[House Hearing, 112 Congress]
[From the U.S. Government Publishing Office]



 
 PPACA'S EFFECTS ON MAINTAINING HEALTH COVERAGE AND JOBS: A REVIEW OF 

                THE HEALTH CARE LAW'S REGULATORY BURDEN

=======================================================================



                                HEARING

                               BEFORE THE

                         SUBCOMMITTEE ON HEALTH

                                 OF THE

                    COMMITTEE ON ENERGY AND COMMERCE

                        HOUSE OF REPRESENTATIVES

                      ONE HUNDRED TWELFTH CONGRESS

                             FIRST SESSION

                               __________

                           JUNE 2 & 15, 2011

                               __________



                         Serial No. 112-56



      Printed for the use of the Committee on Energy and Commerce


                        energycommerce.house.gov



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                    COMMITTEE ON ENERGY AND COMMERCE

                          FRED UPTON, Michigan
                                 Chairman

JOE BARTON, Texas                    HENRY A. WAXMAN, California
  Chairman Emeritus                    Ranking Member
CLIFF STEARNS, Florida               JOHN D. DINGELL, Michigan
ED WHITFIELD, Kentucky                 Chairman Emeritus
JOHN SHIMKUS, Illinois               EDWARD J. MARKEY, Massachusetts
JOSEPH R. PITTS, Pennsylvania        EDOLPHUS TOWNS, New York
MARY BONO MACK, California           FRANK PALLONE, Jr., New Jersey
GREG WALDEN, Oregon                  BOBBY L. RUSH, Illinois
LEE TERRY, Nebraska                  ANNA G. ESHOO, California
MIKE ROGERS, Michigan                ELIOT L. ENGEL, New York
SUE WILKINS MYRICK, North Carolina   GENE GREEN, Texas
  Vice Chairman                      DIANA DeGETTE, Colorado
JOHN SULLIVAN, Oklahoma              LOIS CAPPS, California
TIM MURPHY, Pennsylvania             MICHAEL F. DOYLE, Pennsylvania
MICHAEL C. BURGESS, Texas            JANICE D. SCHAKOWSKY, Illinois
MARSHA BLACKBURN, Tennessee          CHARLES A. GONZALEZ, Texas
BRIAN P. BILBRAY, California         JAY INSLEE, Washington
CHARLES F. BASS, New Hampshire       TAMMY BALDWIN, Wisconsin
PHIL GINGREY, Georgia                MIKE ROSS, Arkansas
STEVE SCALISE, Louisiana             ANTHONY D. WEINER, New York
ROBERT E. LATTA, Ohio                JIM MATHESON, Utah
CATHY McMORRIS RODGERS, Washington   G.K. BUTTERFIELD, North Carolina
GREGG HARPER, Mississippi            JOHN BARROW, Georgia
LEONARD LANCE, New Jersey            DORIS O. MATSUI, California
BILL CASSIDY, Louisiana              DONNA M. CHRISTENSEN, Virgin 
BRETT GUTHRIE, Kentucky              Islands
PETE OLSON, Texas
DAVID B. McKINLEY, West Virginia
CORY GARDNER, Colorado
MIKE POMPEO, Kansas
ADAM KINZINGER, Illinois
H. MORGAN GRIFFITH, Virginia

                                 7_____

                         Subcommittee on Health

                     JOSEPH R. PITTS, Pennsylvania
                                 Chairman
MICHAEL C. BURGESS, Texas            FRANK PALLONE, Jr., New Jersey
  Vice Chairman                        Ranking Member
ED WHITFIELD, Kentucky               JOHN D. DINGELL, Michigan
JOHN SHIMKUS, Illinois               EDOLPHUS TOWNS, New York
MIKE ROGERS, Michigan                ELIOT L. ENGEL, New York
SUE WILKINS MYRICK, North Carolina   LOIS CAPPS, California
TIM MURPHY, Pennsylvania             JANICE D. SCHAKOWSKY, Illinois
MARSHA BLACKBURN, Tennessee          CHARLES A. GONZALEZ, Texas
PHIL GINGREY, Georgia                TAMMY BALDWIN, Wisconsin
ROBERT E. LATTA, Ohio                MIKE ROSS, Arkansas
CATHY McMORRIS RODGERS, Washington   ANTHONY D. WEINER, New York
LEONARD LANCE, New Jersey            HENRY A. WAXMAN, California (ex 
BILL CASSIDY, Louisiana                  officio)
BRETT GUTHRIE, Kentucky
JOE BARTON, Texas
FRED UPTON, Michigan (ex officio)

                                  (ii)

                             C O N T E N T S


                              ----------                              

                              JUNE 3, 2011

                                                                   Page
Hon. Joseph R. Pitts, a Representative in Congress from the 
  Commonwealth of Pennsylvania, opening statement................     1
    Prepared statement...........................................     4
Hon. Frank Pallone Jr., a Representative in Congress from the 
  State of New Jersey, opening statement.........................     7
Hon. Michael C. Burgess, a Representative in Congress from the 
  State of Texas, opening statement..............................     9
Hon. Henry A. Waxman, a Representative in Congress from the State 
  of California, opening statement...............................    10
Hon. Joe Barton, a Representative in Congress from the State of 
  Texas, prepared statement......................................   154
Hon. Edolphus Towns, a Representative in Congress from the State 
  of New York, prepared statement................................   156

                               Witnesses

Randi Reichel, Counsel, Mitchell, Williams, Selig, Gates and 
  Woodyard, PLCC, on behalf of America's Health Insurance Plans..    12
    Prepared statement...........................................    15
Scott E. Harrington, Professor, Health Care Management and 
  Insurance and Risk Management, Wharton School, University of 
  Pennsylvania...................................................    35
    Prepared statement...........................................    37
Janet Trautwein, CEO, National Association of Health Underwriters    52
    Prepared statement...........................................    54
Katherine Hayes, Associate Research Professor, Department of 
  Health Policy, George Washington University....................    62
    Prepared statement...........................................    64
Ethan Rome, Executive Director, Health Care for America Now......    71
    Prepared statement...........................................    73
Edward C. Fensholt, Senior Vice President, Lockton Benefit Group.    85
    Prepared statement...........................................    87
Terry Gardiner, Vice President, Policy and Strategy, Small 
  Business Majority..............................................    96
    Prepared statement...........................................    98

                             JUNE 15, 2011
                               Witnesses

Steve Larsen, Director, Center for Consumer Information and 
  Insurance Oversight, Centers for Medicare and Medicaid Services   121
    Prepared statement...........................................   124
    Answers to submitted questions...............................   158

                           Submitted Material

Statement, dated June 15, 2011, of Randel K. Johnson, Senior Vice 
  President, Labor, Immigration, and Employee Benefits, U.S. 
  Chamber of Commerce, submitted by Mr. Burgess..................   147


 PPACA'S EFFECTS ON MAINTAINING HEALTH COVERAGE AND JOBS: A REVIEW OF 
             THE HEALTH CARE LAW'S REGULATORY BURDEN--DAY 1

                              ----------                              


                         THURSDAY, JUNE 2, 2011

                  House of Representatives,
                            Subcommittee on Health,
                          Committee on Energy and Commerce,
                                                    Washington, DC.
    The subcommittee met, pursuant to call, at 12:05 p.m., in 
room 2322 of the Rayburn House Office Building, Hon. Joe Pitts 
(chairman of the subcommittee) presiding.
    Members present: Representatives Pitts, Burgess, Gingrey, 
Lance, Cassidy, Pallone, Schakowsky, and Waxman (ex officio).
    Staff present: Clay Alspach, Counsel, Health; Jim Barnette, 
General Counsel; Paul Edattel, Professional Staff Member, 
Health; Debbee Keller, Press Secretary; Ryan Long, Chief 
Counsel, Health; Katie Novaria, Legislative Clerk; Heidi 
Stirrup, Health Policy Coordinator; Phil Barnett, Minority 
Staff Director; Alli Corr, Minority Policy Analyst; Tim 
Gronniger, Minority Senior Professional Staff Member; Purvee 
Kempf, Minority Senior Counsel; Karen Lightfoot, Minority 
Communications Director and Senior Policy Advisor; and Karen 
Nelson, Minority Deputy Committee Staff Director for Health.
    Mr. Pitts. The committee will now come to order. The Chair 
will recognize himself for 5 minutes with an opening statement.

OPENING STATEMENT OF HON. JOSEPH R. PITTS, A REPRESENTATIVE IN 
         CONGRESS FROM THE COMMONWEALTH OF PENNSYLVANIA

    I have here on the desk this giant stack of every 
regulation, notice and correction that the Obama administration 
has issued so far related to the recent health care law. By 
count of subcommittee staff, 370 Obamacare-related items have 
been issued. Over 3,500 of pages of rules, notices, and 
corrections have been published, many of which were released as 
interim final rules, bypassing the traditional public comment 
period and giving them the force of law.
    I would like to focus on just two: grandfathering of 
existing health plans and the medical loss ratio, MLR.
    ``If you like what you have, you can keep it,'' was the 
promise that President Obama repeatedly made on the campaign 
trail and in the months leading up to the passage of PPACA in 
March 2010. ``If you like your current plan, you will be able 
to keep it. Let me repeat that: If you like your plan, you will 
be able to keep it.'' That is President Obama with remarks at 
White House on July 21, 2009. ``If you like your insurance 
plan, you will keep it. No one will be able to take that away 
from you. It hasn't happened yet. It won't happen in the 
future.'' President Obama remarks in April 2010.
    During the 2008 presidential campaign and the months 
leading up to passage of the health care reform law, President 
Obama, his administration, and Congressional Democrats made a 
series of promises to the American people. Whether you 
supported PPACA when it became law or not, it has become 
abundantly clear that those promises have been broken.
    According to the administration's own estimates of June 17, 
2010, its regulations will force half of all employers, and as 
many as 80 percent of small businesses, to give up their 
coverage in the next 2 years.
    The regulations state, ``After some period of time, most 
plans will relinquish their grandfathered status,'' meaning 
American workers will lose the coverage they have now and 
become subject to PPACA's more costly requirements.
    A May 2011 Price Waterhouse Coopers survey of employers 
reveals companies' responses to the new health care law and how 
many are contemplating eliminating coverage as a result. It 
also echoes the administration's warnings. Of note, 51 percent 
of employers surveyed did not expect to maintain grandfathered 
health status, meaning their employees would forfeit their 
current coverage and pay higher premiums due to the health care 
law's mandates on their new coverage. The report also found 
that ``84 percent of companies indicated they would make other 
changes to their plans, that is, raising premiums and 
copayments, to offset costs associated with PPACA.''
    The regulations associated with grandfathering health plans 
are just one reason Americans will lose the coverage they have, 
even if they like it. The medical loss ratio is another. 
Despite the fact that the MLR has been billed as a tool to 
protect consumers from insurance companies, many States are 
clamoring for waivers to exempt their citizens from these 
``protections.''
    Recently, the administration granted waivers to New 
Hampshire and Nevada regarding the medical loss ratio 
requirements in the health care law, on top of the waiver 
already granted to Maine. Nine other States still have their 
own waiver applications pending before HHS, Kentucky, Florida, 
Georgia, North Dakota, Iowa, Louisiana, Kansas, Delaware, and 
Indiana.
    In an October 27, 2010, letter to Secretary Sebelius, the 
National Association of Insurance Commissioners warned: ``We 
continue to have concerns about the potential for unintended 
consequences arising from the medical loss ratio. As we noted 
in our letter of October 13, consumers will not benefit from 
higher medical loss ratios if the outcome is destabilized 
insurance markets where consumer choice is limited and the 
solvency of insurers is undermined.''
    Many companies have also applied for MLR waivers. Perhaps 
the most publicized was McDonald's, whose 30,000 employees were 
granted a waiver from the annual limit requirement on their 
mini-med plans and yet were still in danger of losing their 
coverage because they could not meet the MLR requirements.
    The December 1, 2010, MLR regulation exempted mini-med 
plans from the requirement for 1 year, after which HHS will 
determine whether or not to extend the waivers for 2012 and 
2013, meaning employees could still be in danger of losing 
their current coverage.
    The fact that so many Americans have had to be exempted 
from the law's protections under waivers, or risk losing their 
current coverage, should be alarming to every Member of 
Congress.
    And this stack, this giant stack, is just the beginning. 
More regulations are due out in the near future, including the 
establishment of the essential minimum benefits package, which 
will increase premiums and put people's coverage at risk.
    [The prepared statement of Mr. Pitts follows:]
    [GRAPHIC] [TIFF OMITTED] 71723.001
    
    [GRAPHIC] [TIFF OMITTED] 71723.002
    
    [GRAPHIC] [TIFF OMITTED] 71723.003
    
    Mr. Pitts. First of all, thank you to our witnesses today. 
I would especially like to welcome a fellow Pennsylvanian, Dr. 
Scott Harrington, of the Wharton School at the University of 
Pennsylvania, and I will yield back my time.
    The Chair recognizes the ranking member of the 
subcommittee, Mr. Pallone, for 5 minutes for an opening 
statement.

 OPENING STATEMENT OF HON. FRANK PALLONE JR., A REPRESENTATIVE 
            IN CONGRESS FROM THE STATE OF NEW JERSEY

    Mr. Pallone. Mr. Chairman, I really have to object today on 
many levels. You know, this hearing has essentially become a 
farce. There is nobody here, other than yourself, myself and 
Dr. Burgess, and as much as I love to go back and forth with 
you and Dr. Burgess, I think that it is important that other 
members on both sides of the aisle be able to attend.
    Now, I mentioned to you that because of the fact that we 
had the full committee hearing this morning and then we are 
going to have votes I understand as early as 12:30, and then 
were the Democrats and the Republicans yesterday, but the 
Democrats today are leaving at 1:00 to go over to meet the 
President at the President's request, that it would be 
virtually impossible to have a hearing today that members would 
be able to attend. The fact that only the three of us are here 
just lends credence to that.
    You know, I was only asking you to postpone the hearing, 
not because I didn't want to have it, although frankly, I 
wouldn't want to have it because I think that the subject is a 
little absurd, too. I will get into that. But just the fact 
that I was concerned that no one would be able to attend, and 
there isn't anybody here. We are all going to get out of here 
at 1:00, and I guess then we are going to go back, reconvene 
after the President, but then there is going to be more votes. 
So I just think it is terribly disruptive to the witnesses and 
to the process, and I wanted to postpone it because I wanted to 
have everybody to be here and hopefully some come, but it 
doesn't look like they are here.
    Now, the second thing is, you know, again, we are talking 
about repeal or either not the whole of the Affordable Care Act 
in this case, but provisions of the Affordable Care Act. I 
don't know how many times, it is now what, June 2, 5 or 6 
months of just the same thing over and over again, repeal the 
Act, the Act is bad, defund the Act, turn it from mandatory to 
discretionary. I don't know how many times we are going to hear 
over and over about the same thing. I don't hear really much in 
the way of any kind of replacement or Republican alternatives 
that would provide coverage or provide affordable coverage. 
Again, today our focus is on repealing the provisions that 
limit what the insurance companies can do, abundantly clear 
that the Republicans are in the pockets of the insurance 
companies and will do whatever the insurance companies want 
them to do, even if it means at the expense of the public.
    So anyway, I have 2\1/2\ minutes left. Let me get to some 
of my prepared remarks, but I really am very disappointed in 
the way this was set up today and the fact that we keep dealing 
with the same thing to no avail.
    The Affordable Care Act was the transformational law that 
brought protection to patients across the United States' 
healthcare system. We finally were able to put a stop to the 
incendiary insurance industry abuses and reform the insurance 
system. We expanded coverage, reduced healthcare costs and 
reduced the federal deficit while building on the private 
insurance system. We sought after and I believe accomplished 
bringing better value to consumers and insurance plans and 
promoting more affordable comprehensive healthcare to 
Americans.
    Some of the most important reforms made in the Affordable 
Care Act that are meant to curb the insurance industry bad 
practices are the same ones my Republican colleagues will 
attack today. They include the medical loss ratio requirements 
and rate reviews. Medical loss ratio requirements foster 
transparency and accountable in how insurance companies spend 
patients' premiums. They also force insurers to be more 
efficient in delivering quality healthcare. I believe that 
American patients deserve a guarantee they are getting good 
value for their dollar. When that value is not met, insurance 
companies should be required to refund consumers. In fact, HHS 
estimates that up to nine million Americans could be eligible 
for rebates starting in 2012 worth up to $1.4 billion, a clear 
indication there is a real need to hold insurers accountable.
    Today I expect to hear from some of our witnesses that this 
requirement will disrupt the marketplace and limit choices for 
consumers. They will say we need a transitional period in which 
insurers can bring their products in line with these 
requirements slowly and methodically. However, contrary to the 
naysayers, the loss waivers were put in place for potential 
disruptions, but it is the States who are in the best position 
to examine their own markets and make these determinations. The 
waivers are much better suited to be in response to a specific 
State condition rather than a one-size-fits-all transition 
policy.
    Another important critical reform was the process of rate 
reviews. Let me be clear. This is not a provision that 
prohibits or restricts an insurance company from raising their 
rates, but what it does is ensure that any large proposed 
increases are based on reasonable cost assumptions and solid-
based evidence. And this step is meant to hold insurance 
companies accountable and provide unprecedented transparency to 
the healthcare market.
    Now, while Congress was drafting and debating the 
Affordable Care Act, the insurance industry was recording 
record profits. In fact, this year the Nation's largest 
insurers are entering their third straight year of huge 
profits. According to the New York Times, insurance companies 
have reported first quarter earnings that beat analysts' 
expectations by an average of 30 percent. And I have got to be 
honest across the aisle, you simply can't argue that the 
insurance industry has been hurt by the Federal healthcare law.
    Thank you, Mr. Chairman.
    Mr. Pitts. Thank you to the ranking member, and I yield to 
the vice chairman of the subcommittee, Dr. Burgess, for 5 
minutes for an opening statement.

OPENING STATEMENT OF HON. MICHAEL C. BURGESS, A REPRESENTATIVE 
              IN CONGRESS FROM THE STATE OF TEXAS

    Mr. Burgess. I thank the chairman for yielding. I thank you 
for having this hearing today. Goodness knows we could have had 
this hearing in the last Congress, and we should have had this 
hearing in the last Congress. It is well into a year since the 
signing into law of the Affordable Care Act, so it is high time 
we look at some of these things. Both sides of the dais will 
talk about jobs and the economy. We talk about it, we demagogue 
about it, but the big question is, are we going to do anything 
about it. Unemployment is at 9 percent, and it begs the 
question: Why are American employers hesitant to hire new 
employees. Part of the reason might be, just might be, that in 
the first year since the passage of the Affordable Care Act, 
this is what a small business owner confronts when they want to 
hire a new employee. Is it any wonder that they would stop and 
look and say I don't think I can do that at this time? We will 
make do with what we have.
    Now, the burdensome regulations delivered by the United 
States Congress stack up as you can see here to be almost 
insurmountable by anyone who has ever run a small business that 
looks at a stack like this, would say I don't think that is for 
me. But here is the simple truth. You just cannot be anti-
employer and claim to be pro jobs. It doesn't equate.
    Now, the Affordable Care Act, in my opinion, levies 
unreasonable demands on employers, manufacturers, doctors, and 
not only discourages hiring but encourages employers to drop 
their employee health insurance. We certainly punish 
physicians, and we tax industry off-shore and out of America.
    Shortly after the signing of this Act a year ago, large 
employers reported that the law would increase costs. In fact, 
several large employers restated their earnings for the year. 
That inflamed members of the then-majority, and a hearing was 
called in the Energy and Commerce Committee, in the Oversight 
Committee, to call these folks in and make them explain why 
they were restating their earnings.
    Document demands were made of these employers, and they 
produced the documents. The documents were examined, and it 
turned out that the employers were simply complying with the 
Securities and Exchange Commission, but some of the information 
contained within those documents made the then-majority, the 
Democrats, to side not to hold the hearing after all because 
what they found was large employers were looking at the data 
and wondering how in the world it was going to be cost-
effective to continue to provide health insurance. No employer 
wanted to be the first to drop this benefit, but there were 
many who would likely be second, third or fourth.
    The strict medical loss ratio regulations are another 
provision that have proved to be overly burdensome, not only on 
businesses but on the States. Currently three States have been 
given waivers, another 10 are asking and are pending approval.
    Now, a State realizes that their market can't comply with 
the law. How in the world is the person who runs a lawnmower 
shot going to be able to comply with these regulations?
    The Affordable Care Act really ought to come with a boxed 
FDA warning that says, Warning: The Affordable Care Act, when 
used as directed, may be harmful to your health. It may reduce 
your healthcare and increase your cost.
    The overregulation incites a sense of uncertainty which 
discourages hiring and hampers economic development. Every day 
we get another announcement about another rule going into 
effect. Far too many are coming out, and quite frankly, several 
are coming out with the notice of final interim rules, 
completely bypassing public comment. That is, they become, the 
regulations have the force of law, without the period of public 
comment.
    Now, if my friends on the other side of the dais are 
serious about getting Americans back to work, one of the first 
steps should be to loosen the regulatory nightmares that had 
been imposed by this law.
    Again, I thank the chairman for calling the hearing, and I 
will yield back the balance of my time.
    Mr. Pitts. The Chair thanks to the gentleman and now 
recognizes the ranking member of the full committee, Mr. 
Waxman, for 5 minutes for an opening statement.

OPENING STATEMENT OF HON. HENRY A. WAXMAN, A REPRESENTATIVE IN 
             CONGRESS FROM THE STATE OF CALIFORNIA

    Mr. Waxman. Thank you, Mr. Chairman. I want to thank all 
the witnesses for joining us to discuss the important insurance 
reforms in the Affordable Care Act and their implementation. I 
want to say a special thanks to Steve Larsen who has become a 
regular fixture at the Energy and Commerce Committee, and we 
may even have to get him a permanent name plate.
    This hearing is intended to cover all of the regulations 
issued under the Affordable Care Act and those yet to come. It 
is an ambitious hearing that gives us the chance to review 
important new consumer protections being implemented by the 
department, including rate review, the grandfathering rules and 
the medical loss ratio provision.
    Provisions such as rate review and medical loss ratio 
provide consumers with protections from insurance company rate 
hikes and help them receive a good value for their premium 
dollars. Rate review requires transparency so that insurers are 
required to justify why premiums continue to increase. Premium 
increases are a hardship for consumers facing a tough job 
market and a struggling economy, and they are hard to 
understand given that insurer profits have risen by staggering 
amounts.
    Over the last 10 years, the premium cost of family health 
insurance has increased 131 percent. This has led to soaring 
profits. In just the last 3 years, the profits of the Nation's 
largest insurers have risen over 50 percent. Rate reviews gives 
consumers protections against this kind of abuse. Contrary to 
the claims of critics, the law works to review rates based on 
existing State authorities. Some States have more authorities, 
including the right to review rates and deny unjustified 
increases while others merely have transparency requirements.
    The Federal Minimum Rate Review provision provides some 
consistency across the country and offers an easy-to-understand 
explanation of premium increases and their justification for 
consumers. The healthcare reform law's new minimum medical loss 
ratio requirement is aimed at protecting consumers and ensuring 
that their hard-earned dollars are spent on benefits and 
quality improvements and less on insurer profits and CEO 
salaries.
    A number of States have medical loss ratio rules, and the 
new federal law standardizes the calculations and sets a 
minimum of value for consumers wherever they live. The 
calculation allows for quality improvements, innovation and 
fraud detection to be counted as medical expenses.
    Today we will hear from the association that represents 
brokers and agents, that the medical loss ratio calculations 
exclude their commissions. Many brokers and agents provide a 
valuable benefit for their consumers, but exempting their 
commissions for the medical loss ratio in effect means 
increasing premiums and overhead expenses for the consumer. It 
is time to hold insurance companies accountable, particularly 
in markets such as the individual and small group markets where 
they--for years, weakening rules that require them to provide 
better value to the consumers moves us in a closer direction.
    The Affordable Care Act provides a series of popular 
insurers' reforms that have already gone into effect, such as 
allowing adult children up to the age of 26 to stay on their 
parents' insurance, eliminating lifetime limits and prohibiting 
rescissions of insurers when someone gets sick. These apply to 
all plans 6 months after enactment, overriding the 
grandfathering rules because of their importance to families. 
The dependents up to 26 policies have been immensely helpful in 
responding to the downturn in the economy. The prohibition of 
rescissions is responsive to the insurance company abuses and 
has received bipartisan support, and the prohibition on 
lifetime limits of benefits is necessary protection for a 
person with cancer or hemophilia who has nowhere left to turn 
when he or she has exhausted lifetime maximums. In 2014, these 
benefits will be greatly expanded, truly reforming the 
insurance marketplace in the United States. The market will no 
longer reward companies that avoid risk and leave some of our 
sickest with no options. It will be inclusive, accessible, 
affordable, built on the notion of individual responsibility.
    It is important that we understand the implementation of 
these rules, but we need to do so in a constructive manner that 
serves our constituents' needs. We all want a future where the 
insurance marketplace is healthy, competitive and providing 
quality care.
    I yield back my time.
    Mr. Pitts. The Chair thanks the gentleman. That concludes 
opening statements. We will go to the first panel.
    At this time, I would like to thank the witnesses for 
agreeing to appear before the committee, and we will introduce 
them.
    Randi Reichel is a counsel at Mitchell, Williams, Selig, 
Gates & Woodyard, PLLC, and is testifying on behalf of 
America's Health Insurance Plans.
    Scott Harrington is the Professor of Health Care Management 
and Insurance and Risk Management at the Wharton School at the 
University of Pennsylvania.
    Janet Trautwein is the CEO of the National Association of 
Health Underwriters.
    Katherine Hayes is an Associate Research Professor at the 
George Washington University School of Public Health and Health 
Services.
    Ethan Rome is the Executive Director of Health Care for 
America Now.
    Edward Fensholt is the Senior Vice President for the 
Lockton Benefit Group.
    And Terry Gardiner is Vice President for Policy and 
Strategy at the Small Business Majority.
    Your written testimony will be made a part of the official 
record. We ask that you please summarize your testimony in 5-
minute opening statements, and we will go in the order that our 
witnesses were introduced.
    Ms. Reichel, you are recognized for 5 minutes' opening 
statement.

   STATEMENTS OF RANDI REICHEL, ESQUIRE, COUNSEL, MITCHELL, 
    WILLIAMS, SELIG, GATES AND WOODYARD, PLLC, ON BEHALF OF 
 AMERICA'S HEALTH INSURANCE PLANS; SCOTT E. HARRINGTON, PH.D., 
  PROFESSOR OF HEALTH CARE MANAGEMENT AND INSURANCE AND RISK 
 MANAGEMENT, WHARTON SCHOOL, UNIVERSITY OF PENNSYLVANIA; JANET 
 TRAUTWEIN, CEO, NATIONAL ASSOCIATION OF HEALTH UNDERWRITERS; 
 KATHERINE HAYES, ASSOCIATE RESEARCH PROFESSOR, DEPARTMENT OF 
 HEALTH POLICY, GEORGE WASHINGTON UNIVERSITY SCHOOL OF PUBLIC 
  HEALTH AND HEALTH SERVICES; ETHAN ROME, EXECUTIVE DIRECTOR, 
   HEALTH CARE FOR AMERICA NOW; EDWARD FENSHOLT, SENIOR VICE 
  PRESIDENT, LOCKTON BENEFIT GROUP; AND TERRY GARDINER, VICE 
    PRESIDENT, POLICY AND STRATEGY, SMALL BUSINESS MAJORITY

                   STATEMENT OF RANDI REICHEL

    Ms. Reichel. Thank you, Chairman Pitts, Ranking Member 
Pallone, and members of the subcommittee. My name is Randi 
Reichel, and I am an attorney with the law firm of Mitchell, 
Williams, Selig, Gates & Woodyard. I am here today as outside 
counsel to America's Health Insurance Plans, and I thank you 
for the opportunity to testify today about the unintended 
consequences and the regulatory burdens of the medical loss 
ratio requirement under the ACA.
    I think it is really critically important to examine this 
provision and the Department of Health and Human Services' 
regulation that implements the MLR provisions. The 
requirements, the way they have been implemented, impose an 
unprecedented new federal cap on administrative costs of health 
plans and strictly micromanages the plans' abilities to invest 
in initiatives and innovations to benefit their members and 
enrollees.
    There likely will be a number of unintended consequences 
for individuals, families and employers, and there are a number 
of reasons for this. The first is a lack of a uniform 
transition period. Most States today either don't have medical 
loss ratio requirements in the large group, small group or 
individual markets or the ones that do have medical loss ratio 
requirements that are crafted to incorporate existing actuarial 
practices in order specifically to avoid any type of market 
disruption.
    Without the time to make the adjustments and the changes 
that are needed to comply with the MLR provisions, some of the 
health plans in the marketplace today have no choice but to 
exit the market. And you know, we know that we are not crying 
wolf about this, and the reason that we know that is HHS has 
already acknowledged in its letters to Nevada, in its letters 
to New Hampshire, when those two States asked for a waiver of 
the MLR requirements, they conceded that the MLR standard 
could, in fact, lead to a destabilization of the individual 
market in those States.
    While the MLR is problematic across the board for all types 
of health insurance coverage, I think it is important to look 
specifically at the impact that this may have on access to 
high-deductible health plans. There is a reason for this. On a 
per-enrollee kind of basis, fees options are intended to have a 
much higher deductible and they are lower cost to the 
individual. So as result, the--ratios are higher because the 
administration of these plans doesn't cost us any less.
    So the premium is lower, the administrative costs are 
higher, and the MLR, by not taking the kind of differences or 
special circumstances of these plans into account really 
provides a significant challenge to the companies that write 
this business and make it really questionable whether or not 
the individuals who have this very popular, very affordable 
option are going to be able to continue to either obtain it or 
maintain the policies that they have going forward.
    Even more than that, one of the things that we are really 
concerned about right now is that the MLR requirements do in 
fact turn back the clock on any kind of efforts to prove 
quality and prevent fraud and abuse, and they do this for two 
reasons. One is they only permit dollar recoveries from fraud 
programs to be counted toward the MLR, but they penalize 
companies for actually preventing fraud in the first place. And 
they don't recognize as quality the expenses of transitioning 
into the ICD-10 coding system that is intended for disease 
eradication and quality.
    By having only four categories that qualify as quality 
categories, the MLR requirements inhibit any kind of--by 
capping expenses for real quality programs that may fall 
outside the very guardrails of those four quality categories. 
The way the regulation is structured, I think it is going to be 
very problematic moving forward.
    And the most telling thing is that while the MLR is 
intended to put a cap on administrative costs, indeed the MLR 
itself is going to increase administrative costs. There are a 
host of new reporting requirements that companies have to 
undergo in order to comply with the new regulations. The 
companies are going to have to have new data collection, new 
accounting, new auditing and the staff and the ramp-up for all 
of these things.
    We have talked to AHIP members, and preliminary estimates 
from at least some of the larger multi-State plans have put 
some of their preliminary compliance costs at more than $20 
million.
    Mr. Pitts. Would you wrap up, please?
    Ms. Reichel. I don't want to repeat what else is in our 
testimony. We do have some recommendations to mitigate the 
harmful impact of the medical loss ratio. With that I will 
thank you for the opportunity to testify and present our 
perspective.
    [The prepared statement of Ms. Reichel follows:]
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    Mr. Pitts. Thank you. Dr. Harrington?

                STATEMENT OF SCOTT E. HARRINGTON

    Mr. Harrington. Chairman Pitts, Ranking Member Pallone, Mr. 
Burgess, I am pleased to testify on rate review and minimum 
medical loss ratio regulation under PPACA.
    These regulatory schemes entail costly, complex 
bureaucratic interference with insurers' legitimate business 
decisions and with State regulatory prerogatives. They are not 
going to increase competition or improve the availability and 
affordability of health insurance. The rate review scheme will 
not enhance consumer choice or significantly lower premiums. It 
will increase insurers' costs and risk, reducing their 
willingness to expand coverage or offer new products and 
ultimately undermine their financial soundness.
    The minimum medical loss ratio scheme is going to distort 
insurers' legitimate operating decisions, including some 
actions that would help reduce costs. Without significant 
waivers, it will destabilize some States' markets. It 
represents a significant move toward government micromanagement 
of health insurers.
    It is desirable to replace the rate review and medical loss 
ratio regulations with pro-competitive forms including State 
option of policies that promote thoroughly informed competition 
and consumer choice.
    In my remaining few minutes, I want to focus on rate 
review. The Act does not authorize HHS to explicitly approve or 
deny proposed rate changes but it requires individual and small 
group health insurers to justify ``unreasonable'' rate 
increases, either to State regulators if the States pass muster 
with HHS for having reasonable effective review, or otherwise 
to HHS. The complex HHS regulations initially specify a 10 
percent threshold for determining whether or not a rate 
increase is potentially unreasonable and requiring additional 
justification. State-specific thresholds will likely begin in 
2012. Any insurer that goes ahead and tries to implement a rate 
increase that is held to be unreasonable will be publicized and 
most likely publically condemned. It also can be excluded from 
participation in the exchanges.
    The law grants monies to States to enhance their rate 
review. It grants monies in the future to States that have 
prior approval rate regulation or adopts such regulation, 
further promoting direct price controls on health insurance.
    These provisions reflect the views that competition and 
prior State regulation did not adequately discipline health 
insurers' expenses and profits, but health insurers' expenses 
and profits are not significant drivers of high and rapidly 
growing health insurance costs. According to the National 
Health Expenditure Data, for example, the estimated annual 
private heath insurance medical loss ratio, the ratio of 
medical cost to premiums, including self-funded plans, has 
averaged about 88 percent since 1965, ranging from 85 to 90 
percent with little or no trend over time. Now, there is a lot 
of variation across companies. Health insurers' profit margins 
typically average 3 to 5 percent of revenues, lower for not-
for-profit insurers. Administrative expenses average 11 to 12 
percent of premiums.
    Market concentration is often relatively high at State and 
metropolitan levels, but it varies widely across regions, and 
that does not imply adverse effects on consumers.
    State oversight for individual and small group health 
insurance of rate changes is very diverse and in many respects 
similar to automobile and homeowners' insurance regulation. The 
Act's rate review provisions establish significant federal 
authority over rate increases, and those State review process, 
these provisions and their implementation will further 
publicize insurance pricing without enhancing consumer choice, 
increase in quality or lowering cost.
    Research has not provided detailed evidence on health 
insurance rate regulation, but the adverse consequences of 
binding rate controls, politicization of insurance pricing, 
have been aptly documented for automobile insurance, workers' 
compensation insurance and more recently, homeowners' insurance 
in catastrophe prone regions. There is no reason to believe 
that requiring prior regulatory approval or tighter review of 
health insurance rates will be any different.
    A large body of research indicates that rate regulation 
cannot and does not lower insurance rates without reducing 
coverage availability or causing exit by insurers. Analyses of 
automobile insurance, for example, found no consistent 
difference over time in premiums relative to loss costs in 
States with and without prior approval, but prior approval rate 
regulation has been associated with less coverage availability, 
short run rate suppression, increased market volatility and 
increased insurer exits.
    In short, the rate review and MLR provisions are 
unnecessary and counterproductive. It would be better to repeal 
these provisions and replace them with pro-competitive 
regulation and disclosure at the State level.
    Thank you.
    [The prepared statement of Mr. Harrington follows:]
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    Mr. Pitts. The Chair thanks the gentleman and recognizes 
Ms. Trautwein for 5 minutes for her opening statement.

                  STATEMENT OF JANET TRAUTWEIN

    Ms. Trautwein. Thank you. My name is Janet Trautwein, and I 
am the CEO of the National Association of Health Underwriters. 
NAHU is the leading professional trade association for health 
insurance agents, brokers, and consultants representing more 
than 100,000 benefit specialists nationally.
    I am here today to tell you about a desperate economic 
situation that has developed over the past 18 months. It has 
caused real people to suffer real harm. This dire situation was 
triggered by the issuance of the Interim Final Rule on Medical 
Loss Ratios. Since the rule was issued by the Department of 
Health and Human Services on December 1, 2010, health insurance 
carriers across the country have been forced to cut 
administrative costs to comply.
    One of the first places that was hit was agent commissions. 
Now, in reality, agent commissions being considered an insurer 
expense is really not even accurate. The consumers who purchase 
health insurance coverage are the ones who hire and can fire 
their brokers, not insurers. Independent agents pay 100 percent 
of their own business expenses. Whether accurate or not, the 
Interim Rule categorizes commissions as an insurance expense 
largely because these commissions were not specifically listed 
as an item that could be carved out of the MLR calculation as 
were taxes, and as a result, our members report that most 
health insurance carriers changed commission rates as of 
January 1, 2011, the date the MLR rule became effective.
    These commission changes have already decreased many of our 
members' incomes by 20 to 50 percent. About 3/4 of the members 
of my associations are principals of their own small businesses 
and employ multiple individuals from their communities, operate 
in every State and in every community, large and small. As a 
direct result of the new law provisions, these individuals are 
reporting that they are being forced to reduce services to 
their clients, to cut benefits to their employees and eliminate 
jobs just to stay in business. In some instances they are 
reporting they are just closing their doors. This means that in 
the future, unless something is done, there will be far fewer 
health insurance agents to provide for consumers' needs.
    Now, some of you have probably have never had the good 
fortune to work with a broker, and you may not understand what 
this really means or consumers. So I would like to tell you a 
story that illustrates what I am talking about. This is a story 
that I know well, and I know it because I personally 
experienced it. I am here today not just as the head of an 
association but as someone who knows the people who have been 
affected. And before I came to NAHU, I was an insurance broker 
myself for almost 20 years in Texas. And I had a large number 
of clients that I built up over many years, and I did that by 
providing them great service and benefits at the lowest 
possible cost. I promised them that I would help them with any 
issue that came up relative to their plan, and I am proud to 
say that during the 20 years that I was in business, not a 
single one of my clients or a single one of their employees or 
dependents ever had to go to appeal on a claim and that is 
because we took care of issues before it required that type of 
action.
    And I want to tell you quickly about one situation that I 
remember in particular, and it is hard to forget a situation 
like this. This particular employee had AIDS, and his health 
plan had already paid out hundreds of thousands of dollars for 
traditional types of treatments, and none of these had really 
been effective in preventing the progression of his disease.
    He came to me in desperation because his doctors had given 
him 6 months to live, and he said, look, I have done some 
research, and I found this one treatment that I really want to 
try, but he wasn't able to go through with the treatment 
because it was considered experimental by his plan.
    After a lot of work negotiating with his health plan as 
well as the providers for his treatment, we got that treatment 
covered because we knew how to do it, and he never would have 
been able to do that on his own. It was difficult to do, but we 
managed to make it work.
    You might think that this kind of service would be very 
expensive. The fact is that most agents and brokers just really 
don't make a lot of money. The Bureau of Labor Statistics says 
that the average for agents and brokers is $45,000 to $62,000 a 
year. Entry-level agents only make about $25,000 a year, and 
this is before the cuts that occurred on January 1.
    So you can understand the desperation of the situation that 
we are in, and none of us would find it very easy to take those 
types of cuts.
    There is a simple solution. As many of you are aware, 
Representatives Mike Rogers of Michigan and John Barrow of 
Georgia, both of whom serve on this committee, have introduced 
H.R. 1206, the Access to Professional Health Insurance Advisors 
of 2011. Currently it has 85 bipartisan co-sponsors, 21 on this 
committee.
    And I realize that I am out of time, but I would like to 
ask for your immediate consideration of this legislation. It is 
a reporting change, but it something that would provide 
immediate relief to many, many people across this country.
    Thank you very much.
    [The prepared statement of Ms. Trautwein follows:]
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    Mr. Pitts. The Chair thanks the gentlelady and recognizes 
Ms. Hayes for 5 minutes.

                  STATEMENT OF KATHERINE HAYES

    Ms. Hayes. Thank you, Mr. Chairman, for giving me the 
opportunity to be here today and also members of the 
subcommittee.
    The last time I was in this room was 20 years ago as a 20-
something health staffer for a member of the Health 
Subcommittee, Mickey Leland, from Texas. And knowing that 
Mickey was first a Texan and second, a Democrat, it is nice to 
see that Texas is still well-represented on the subcommittee.
    Today I am here to talk to you about insurance market 
reforms, generally the impact on individuals and small 
businesses. I am a Professor at George Washington University, 
and my research focuses on implementation of the health reform 
bill.
    This committee and subcommittee has a really long history 
of working to protect not only low-income individuals but 
individuals in the small group and individual non-group health 
insurance market. Chairman Bilirakis, former subcommittee 
chairman, and Chairman Tom Bliley put together the Health 
Insurance Portability and Accountability Act which laid the 
foundation for the Accountable Care Act. What it did was 
preserve McCarran-Ferguson and allowed health insurers or 
allowed States to regulate health insurance with certain 
minimum standards. And the reason Congress stepped in and did 
that, it was after health reform failed back in 1993 and 1994, 
was they saw the burden and the dysfunctional markets in the 
non-group or individual and small group health insurance 
markets and wanted to step in to do something. And the 
Affordable Care Act insurance markets reforms really build on 
that.
    And it is important to recognize, too, that both parties, 
when the debate began in health care reform, were supportive of 
these insurance market reforms, although their views of it were 
different. Both were very concerned about individuals and small 
groups.
    The problems in the small group market are well-documented. 
Although health insurance plans are prohibited from denying 
coverage for small groups, for small businesses, they can 
charge whatever they want; and quite frankly, although some 
States have implemented rate bans to limit that, generally, in 
some States small businesses can pay a 100 percent surcharge 
because of the risk, the high-risk individuals that they 
employ.
    The Affordable Care Act was really laid out in two phases 
if you look at the statute itself. One, there was envisioned a 
transition period that began with date of enactment, ending in 
2014 when most of the insurance market reforms went into place. 
There were a number of experts, insurance experts and 
regulations, came before Congress and told Members of Congress 
that yes, it is very important to reform these markets, but you 
need to be careful. You need to phase in things slowly. You 
need to build in protections, and the Affordable Care Act does 
include that. Some examples of the protections and the 
transition rules that were put in to the Affordable Care Act 
include grandfathering of health insurance plans. They include 
high-risk pools, small business tax credits and the insurance 
market reforms which include the immediate reforms, annual 
limits on coverage and coverage of dependent children, as well 
as medical loss ratios.
    In a review of the--it is easy to see the administration is 
following the pattern that was set out in the Affordable Care 
Act, which is namely to get through the transition period to 
full implementation in 2014.
    Ultimately, small businesses have quite a lot to gain under 
the Affordable Care Act. They will be able to purchase health 
insurance coverage through exchanges. They will have options. 
And they will be able to pool both risk and some of their 
administrative costs. And finally, even though small businesses 
that choose not to provide health insurance coverage for their 
employees, because for the smallest businesses, it isn't a 
requirement to provide coverage at all, their employees will 
benefit from the tax credits and in the Affordable Care Act and 
can purchase through the exchanges. At the end of the day, this 
will benefit small businesses because their employees will be 
ensured, they will have less absenteeism, and ultimately, those 
with health insurance coverage have better health outcomes and 
better health status.
    In conclusion, Mr. Chairman, and members of the 
subcommittee, the Affordable Care Act has tremendous potential 
to lower costs for small business and to make their health 
benefits competitive with large businesses, an important factor 
in recruiting and retaining a workforce.
    Thank you very much.
    [The prepared statement of Ms. Hayes follows:]
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    Mr. Pitts. The Chair thanks the gentlelady and recognizes 
Mr. Rome for 5 minutes for his opening statement.

                    STATEMENT OF ETHAN ROME

    Mr. Rome. Mr. Chairman and members of the committee, thank 
you for giving me the opportunity to testify today.
    Healthcare for America Now is the Nation's leading 
grassroots advocacy organization on healthcare and a strong 
supporter of the Affordable Care Act.
    The ACA includes many sorely needed market reforms, 
consumer protections, extended coverage provisions, and cost 
savings already benefitting millions of Americans.
    While much of the country is still struggling in this tough 
economy, health insurance companies have posted record profits 
with premiums that are crushing America's families, seniors and 
businesses. That is why the provisions of the law that hold the 
insurance industry accountable and the worst abuses incurred by 
unreasonable rates are so critical.
    Thanks to the law, we have a new MLR rule that has been 
discussed that requires that insurers must spend on actual 
medical care a specific amount instead of on wasteful overhead, 
excessive profits and bloated executive compensation. The MLR 
combats the long-term downward trend and ensures insurers' 
spending on medical care as a percentage of premiums. While the 
MLR was about 95 percent back in 1993, it is 80 percent or less 
among large insurers today. That is thankfully changing 
already. The new rule is already cutting rates for some 
consumers like Aetna subscribers in Kansas, an intended 
consequence of the MLR and it promises up to 2 billion in 
rebates nationwide if insurers fail to meet the standard.
    We also have the rate review regulations that have been 
discussed which will substantially reduce rates as well. We 
have seen over the last year several examples where the 
intervention of insurance commissioners have already reduced 
rates.
    Aggressive rate review is imperative given the sharp rise 
in premiums, as has been discussed, 114 percent of the last 10 
years for families with unemployment-based insurance, three 
times greater than wage growth. And while insurers blame these 
increases on the rising cost of medical care, premiums have 
been going up at double the rate of medical inflation.
    The big driver is profits. The Wall Street-run health 
insurance companies, their profits jumped 51 percent from 2008 
to 2010. In 2010 alone, their combined profits were 11.7 
billion, up from 9.9 in 2009, despite a 4 percent decline in 
enrollment. New data indicate they are on their way to record 
profits in this as well.
    But reported profits tell only a fraction of the story. 
Insurers have also amassed a capital surplus that vastly 
exceeds the Nation's major for-profit and non-profit, what they 
are required. According to CitiGroup analysis, the Nation's 
major for-profit and non-profit health insurance companies held 
an astonishing 90.3 billion in total risk-based capital to 
cover unexpected medical claims as of December 31, six times 
more than necessary. And virtually unnoticed by many, the for-
profit insurers have steadily moved billions of dollars of cash 
off their balance sheets to buy back their own shares on the 
New York Stock Exchange. This increases profits and share 
prices. It does nothing to improve patient care or the quality 
of their programs.
    The profits are astonishing. Their CEO pay is breathtaking. 
But what is galling and unacceptable is that the insurance 
companies impose double-digit premium hikes on America's 
families and businesses year after year to pay for these--and 
they do so at a time when our families and businesses simply 
can't afford to pay more. And it is clear these rate hikes are 
not justified. They could reduce rates by dipping into their 
capital surpluses. They could reduce rates given that 
utilization is going down.
    Two final quick things. We should not be spending our time 
talking about how to undermine the Affordable Care Act. For 
example, taking broker commissions out of the MLR equation. 
What that will do is jeopardize 1.4 billion in rebates for 
consumers, and as rates have gone up 100 percent over the last 
10 years, so, too, have the commissions of brokers.
    We can also increase rate regulation by expanding rate 
review by enhancing the Health Insurance Rate Review Act 
sponsored by Representative Schakowsky and Feinstein which will 
give HHS greater power to review rates.
    America's families and small businesses desperately need 
relief. With aggressive implementation of the ACA, the days of 
health insurance price gouging will come to an end. Thank you 
very much.
    [The prepared statement of Mr. Rome follows:]
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    Mr. Pitts. The Chair thanks the gentleman and recognizes 
Mr. Fensholt for 5 minutes' opening statement.

                STATEMENT OF EDWARD C. FENSHOLT

    Mr. Fensholt. Chairman Pitts, Ranking Member Pallone and 
members of the committee, my name is Edward Fensholt and I am a 
Senior Vice President with Lockton Benefit Group headquartered 
in Kansas City, Missouri. Lockton Benefit Group provides 
employee benefits consulting services primarily middle-market 
employers, about 2,500 of them from coast to coast. Most of 
them self-insure their healthcare coverage, that is, they pay 
claims out of their general assets. Fewer than half buy group 
insurance from insurance companies.
    Mr. Chairman, that stack of papers to your right has been 
my life for the past year. My day-to-day job is to run Lockton 
Benefit Group's Health Reform Advisory Practice where we steer 
our clients through the maze of regulations and rules. And I 
might add, Mr. Chairman, that that stack of regulations and 
rules is not only a burden on small business, it is a challenge 
to our clients in the middle market and to large employers as 
well.
    If I could sum up the views of our clients in a couple of 
words, those words would be frustration and bewilderment. The 
men and women who run these companies and supply jobs in their 
communities provide valuable health insurance benefits to their 
employees, but they struggle to do that. They struggle with the 
financial aspects of that coverage and with the dazzling array 
of federal rules and regulations they must navigate in order to 
provide that coverage.
    For example, today, as we speak today, there are more than 
50 separate notices, disclosures and reports to the Federal 
Government that a health plan sponsor must make just for the 
privilege of sponsoring a group health insurance plan, never 
mind their notices on their 401(k) plans, their OSHA notices, 
their EEOC notices, EPA notices, whatever, a simple healthcare 
plan has north of 50 notices, disclosures and reports it might 
be required to supply under federal law alone. Nineteen of 
those have been added by the health reform law so far.
    These obligations impose additional hassles, headaches and 
costs to our clients and subject them to all these penalties 
for failure.
    The health reform law adds a variety of new benefit and 
coverage mandates that add additional costs and complexities 
the sponsorship of a group health insurance plan. Our clients 
understand why Congress would act to supply access to health 
insurance for those who do not have that access or cannot 
afford it, but they simply do not understand why, in a time 
when everyone agrees that health insurance and healthcare is 
too expensive, why Congress would act to make the provision of 
employer-sponsored insurance, to which about 150 million of us 
obtain, more costly and particularly more hassle prone.
    We recently finished a 12-question survey of our clients on 
the impact of healthcare reform on them and the plans they 
sponsor. Over and over we received the same responses we have 
been hearing literally from them for the last year, comments 
such as these, taken verbatim from our survey results. We 
currently provide healthcare coverage to our employees. The 
reform Act will do nothing but add cost and add administrative 
requirements. The law is burdensome with little benefit to 
employer or employee. In the long run, the law will reduce 
access to healthcare services and dramatically increase the 
cost to both the employer and the employee. What they, meaning 
the Congress, are planning is only going to penalize the 
employers and employees who actually are hard workers and are 
trying to make a living for themselves and not relying on the 
government to take care of them.
    The law includes a grandfather clause ostensibly intended 
to shield existing group plans from the law's costly mandates 
and other provisions. But it is a poor shield indeed. It 
supplies no protection from several requirements such as the 
obligation to eliminate lifetime and annual dollar maximums the 
plans have used for years as--cost containment measures or the 
obligation to supply coverage to adult children, even if 
married, even if non-dependent upon the employer or living 
apart from the employee and spouse or even if the child is 
gainfully employed himself or herself.
    The grandfather shield does protect plans from other 
mandates, but the grandfather protection is so easy to lose as 
a result of routine plan design changes that the vast majority 
of our--grandfather status immediately.
    In our survey, 18 percent of our respondents said they 
would consider eliminating group coverage in 2014. To be fair, 
few have said they will do it for sure. Few have said they will 
definitely maintain coverage. Mostly they say we will wait and 
see. We may not be the first to cancel our group plan, but we 
will not wait to be third, either.
    In closing, let me say it simply seems to us and our 
clients that if Congress were inclined to attempt to address 
health insurance access issues, it should not punish employers 
in the process. Our clients are not the bad guys. They don't 
understand why this law makes the provision of group health 
insurance more burdensome and more costly, rather than less so.
    Thank you, sir.
    [The prepared statement of Mr. Fensholt follows:]
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    Mr. Pitts. The Chair thanks the gentleman and recognizes 
Mr. Gardiner for 5 minutes for an opening statement.

                  STATEMENT OF TERRY GARDINER

    Mr. Gardiner. Thank you, Mr. Chairman. Good afternoon, 
Chairman Pitts, and Ranking Member Pallone and members of the 
subcommittee. My name is Terry Gardiner. I am working with the 
Small Business Majority, and we are a non-profit national group 
advocating for small business owners out there. We represent 
the 28 million small businesses which many of those are self-
employed and businesses from 1 to 100 employees. We do 
scientific opinion polls and economic research to try to 
understand what the problems and the solutions that small 
businesses need.
    I myself started as a self-employed commercial fisherman 
for many years in Alaska until I got one of those 
entrepreneurial ideas to--a bigger company called Silver Lining 
Seafoods in 1981 and spent the next couple decades as an owner 
and CEO of that company growing it from start-up to $100 
million with a thousand employees selling globally in 22 
countries. So I have been through this as many of the other 
people in Small Business Majority have been of being out there 
and dealing with healthcare and access to capital and all these 
issues that all small business owners have to navigate to 
survive and be successful and create jobs.
    So we are well aware that many times there are regulatory 
burdens, lots of reports to fill out there. I think with 
healthcare, we have also watched for decades and endured while 
it only got worse. And so we felt that something has to be 
done, and there is a legitimate role for government to step in 
when things are only getting worse, as we have seen over the 
decades with costs going up and less availability, and over 
half our small businesses don't even offer anymore.
    So when we survey small business owners, what we find is 
that cost is really the biggest concern. Our research showed an 
average of 86 percent of small business owners cite cost as 
their biggest barrier. A major economic study we did found that 
small employers would pay $2.4 trillion in increased healthcare 
costs through the next decade if nothing changes. And in fact, 
we would lose 178,000 jobs and $52 billion in profits with no 
reform. This is why we have the Affordable Care Act, because 
that was the status quo. We needed to do something.
    One aspect that we are here to talk about today is the 
medical loss provision, and certainly insurance companies and 
brokers have a stake in this. You have heard about that, but I 
think you need remember that employers are paying the bill. 
Small employers are paying the bill in the small group market. 
Self-employed people are generally purchasing in the individual 
market, and all of these dollars and costs we are talking about 
passed through. And so whether the MLR is effective or not is 
really going to come out of the bottom line of small 
businesses, and whatever small businesses pay and more and more 
cost is really going to reduce their ability to expand their 
company and create jobs, and if we want small business to 
continue to create 70 percent of the jobs, then we need to be 
thinking about this.
    So we need to, you know, work out some of these problems. 
We need to make sure that the MLR is protecting the small 
businesses because what we hear in meeting after meeting is 
small business owners standing up saying I got a double-digit 
increase this year on top of one last year. That should really 
be our focus. What are we doing about that? You know, in 
general, these small business owners are paying 18 percent more 
than the larger business owners. So I think the other thing we 
are here to talk about today is the rate review, and really 
what we are talking about here is transparency. As has been 
pointed out, there is no real hammer of the Federal Government 
to do anything about it, but again, this is something that, as 
a small business owner, you never get an explanation of why the 
premiums have gone up double-digit. You are just told this is 
the way it is by your broker, and we certainly support brokers. 
I always used the broker. Everybody I know used brokers. They 
are an integral part, and we believe they will be a very 
important part in the exchanges going forward.
    But again, somebody has to pay the bill, and if we just 
continue to shrink and shrink the number of small business 
owners because of double-digit inflation, that will be a 
reason, you know, that insurance companies' business shrinks 
and brokers' business shrinks.
    So I would just like to conclude by saying I think these 
are important parts of overall health reform. We need to get on 
with the show and implement the exchanges and the tax credits, 
and if anything expands those tax credits along with these 
regulatory reforms so we can bring the cost down of health 
insurance for small businesses.
    [The prepared statement of Mr. Gardiner follows:]
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    Mr. Pitts. The Chair thanks the gentleman. That concludes 
the openings statements. We are presently in a vote on the 
floor. There are seven votes scheduled, so with the appointment 
at the White House at 2:00 for the Democratic members, we will 
recess for questions of this panel until 4:00. If you can stay, 
we would like to ask that you can do that, and we will 
recognize the ranking member, who wants to express himself.
    Mr. Pallone. Well, Mr. Chairman, I mean, you know, this is 
the same thing that I said at the beginning. I told you so, I 
think the way we are proceeding is just not good. I mean, there 
is almost nobody here other than, you know, the three of us and 
I see that we were joined by one colleague on either side of 
the aisle, but I just think that most of the members have been 
discouraged from being here because the panel has now spoken, 
the questions are going to come later, we are going to have a 
second panel after that. I don't know what time. And I don't 
know what you are supposed to do now. I guess you have no 
choice.
    But I just want to again object to the fact that we are 
proceeding this way. I think it is not good for the witnesses 
because they have to wait around for us to come back 4 hours 
later, and the result is that the members are not here to 
participate. So I don't know what to say. I mean, I keep saying 
the same thing over and over again. I just hope this is the 
last time that we proceed in this way because it is just not 
conducive to a good debate, frankly.
    Mr. Pitts. I regret it is unfortunate we have to postpone 
the hearing. We will make a call to all the members to be back 
in 3 hours at 4:00 and ask the indulgence of the witnesses if 
they can return at that time.
    Mr. Pallone. Mr. Chairman, can I ask what we are going to 
do about the second panel?
    Mr. Pitts. I think perhaps on the second panel we are going 
to have to delay the second panel for another day.
    Mr. Pallone. Well, again, I don't see why if he--
    Mr. Pitts. He is limited on his time constraints at the end 
of the day.
    Mr. Pallone. I understand that, but we knew that from the 
beginning and now we are going to end up having the hearing 
when we come back after recess. My original request was that we 
postpone it until then anyway. So now we are going to have to 
postpone it. It just seems like the whole thing could have been 
handled better. We could have just had it when we came back, 
and everything would have been straight through and members 
would have been here. Now we are going to have a second hearing 
when we come back. I just, you know--it just seems like--let us 
just hope that this doesn't happen again.
    Mr. Pitts. Unfortunately, we have got to work around the 
President's schedule, and I regret that. But we will reconvene. 
We will recess until 4:00.
    [Recess.]
    Mr. Pitts. The subcommittee will come to order, and I will 
now begin questioning and recognize myself for 5 minutes for 
that purpose.
    Let me start with Ms. Trautwein. You talked about the dire 
situation facing brokers across the country. Do you believe the 
reduction in income and employment for agents and brokers as a 
result of the MLR rule will make more Americans dependent on 
Medicaid and the health coverage subsidies from PPACA? If so, 
would you elaborate?
    Ms. Trautwein. Yes, thank you. Well, certainly as I 
testified earlier, if you look at what the average income of 
agents and brokers are today already, it is easy to see that 
many of them would be in the category where they would, if they 
were not insured through an employer-sponsored plan, already be 
eligible for subsidies and certainly with a reduction of 20 to 
50 percent, that absolutely would put many of them down into 
the Medicaid levels, particularly when you consider the 
expansion of Medicaid that is associated with the law.
    So yes, I would say that many of them probably, no doubt 
would definitely qualify for subsidies, and many of them would 
also qualify for Medicaid if this is not turned around.
    Mr. Pitts. Now, some argue that insurance agents add no 
value to the system and are simply overhead in the system that 
can be eliminated at the stroke of a pen or regulation. 
Elaborate a little bit on the role agents play in the 
healthcare system please.
    Ms. Trautwein. Well, the first thing I would like to say 
there is that, you know, agents and brokers have been used for 
100 years to help people purchase health insurance coverage, 
and they have been used by insurance carriers for a reason, and 
it is because it is efficient. And from time to time, and I 
have been in the industry 30 years, I have seen carriers say 
look, we are going to try to get lean and mean here, and we are 
going to use our own people. And invariably it doesn't last 
very long. Usually it is a year or less, and they are back to 
using agents and brokers because it is more efficient, because 
they get a larger number of people enrolled, and they are able 
to do it at a lower cost.
    Then you have the service aspect which I talked about 
earlier, and I gave you one example. But those types of things 
happen all the time, every sort of claims situation that you 
can imagine. And this is all at a time when it is taking much 
more time for them to do their jobs because they have so many 
questions about the new law, particularly from their employer 
clients, and for their small employers, they often serve as 
their HR department. You would be surprised all the things that 
they actually do.
    Mr. Pitts. Thank you. On the issue of fraud, Ms. Reichel, a 
``60 Minutes'' episode last year pegged the amount of fraud and 
abuse in the Medicare program at more than $60 billion a year. 
Some have estimated that it might be closer to 100 billion. Do 
you agree? Does anyone disagree that the amount of fraud and 
abuse in the Medicare program could be as high as $60 billion 
as ``60 Minutes'' reported?
    Ms. Reichel. I have seen that number on the ``60 Minutes'' 
report, yes, and I know that that is accurately what they have 
reported.
    Mr. Pitts. Now using that small number of 60 billion that 
is about 12 percent of Medicare spending per year. Using the 
higher number of 100 billion, the percentage is about 21 
percent. Would a private plan be able to stand--12 percent or 
21 percent of its claims were a result of fraud and abuse?
    Ms. Reichel. I think it would be quite difficult for them.
    Mr. Pitts. Will the MLR rule hinder Plans' ability to stop 
fraud before it happens and if Plans are forced to pay more 
fraudulent payments, will premiums increase?
    Ms. Reichel. You know, that is really an excellent 
question. The way the MLR is structured, Plans are not going to 
be able to get credit for preventing fraud. Fraud prevention 
activities are categorically excluded from the medical loss 
ratio, and the only thing that Plans can get credit for is the 
dollar amount that they have actually recovered after the 
payments have already been made and services that are 
potentially fraudulent have already been rendered.
    Mr. Pitts. I only have 30 seconds left, but Dr. Harrington, 
I watched your reaction when someone else was testifying about 
the excess profits. Would you care to comment on your reaction 
to the testimony of the excess profits insurance companies 
make?
    Mr. Harrington. Two quick things, I think. Whenever I look 
at profits, I tend to look at profit margins because this is a 
big country with a big industry, and if you look at dollar 
amounts, they can be big dollars on a small percentage of total 
premiums.
    I apologize for my reaction. My reaction was really to the 
issue of insurance companies' allegedly holding all this 
capital in excess of what is required by regulation. I have 
done a lot of work on insurance company capital requirements, 
regulatory requirements are the very bare minimum to keep 
regulators from taking over the company, and to me it really 
makes no sense to start comparing the amount of capital the 
company holds compared to that regulatory requirement as some 
measure of how much money it could disperse to--the leadings 
health insurers typically have financial strength ratings from 
rating agencies in the neighborhood of A to A-minus. They are 
not A-plus, they are not A-plus-plus. So certainly the rating 
agencies that are evaluating their solvency do not regard the 
amount of capital they are holding as excessive relative to 
their responsibility to meet unforeseen contingencies to their 
policyholders.
    Mr. Pitts. Thank you. My time is expired. The Chair 
recognizes the ranking member, Mr. Pallone, for 5 minutes for 
questions.
    Mr. Pallone. Thank you, Mr. Chairman. I want to ask Mr. 
Rome, your testimony notes that from 1999 to 2009 health 
insurance companies raised premiums 131 percent, three times 
the growth of wages and four times the rate of overall 
inflation. One of the regulations that Republicans are 
attacking here today is the so-called rate review regulation, 
which I think requires very little of health insurers. It only 
asks that they provide a justification to HHS for any premium 
increase of 10 percent more. Insurance companies with that 
amount of rate increase will be identified on a public Web 
site. It seems to me that this is the least we can do to try to 
stop excessive premium increases. So I just wanted to ask you, 
what more can you tell us about the state of profitability of 
the insurance industry today? Is rate review going to be an 
impossibly onerous burden for the insurance companies to meet? 
Have you seen an impact from rate review on premiums in any 
States in which it has been implemented so far?
    Mr. Rome. Rate review does a couple of very important 
things. One is it brings transparency to this process, and if 
insurance companies are selling a good product with good 
rates--there ought to be no problem taking a close look at. 
Rate review, which just today the California Assembly passed 
and it--Senate, the good example there is auto insurance. They 
have had rate reviews since--prior rate approval, there is a 
robust and competitive market. But it has brought down rates. 
In just the last year-and-a-half, aggressive intervention by 
regulators has reduced rates in multiple places with health 
insurance. And so anytime you see rates getting reduced in 
Massachusetts from 18 to 10 percent, et cetera, you know that 
those rates have some room, and regulation helps find it.
    Mr. Pallone. The second question was mentioned I think or 
someone said that Aetna recently announced in Connecticut they 
will reduce premiums in the individual market there by 5 to 20 
percent or 10 percent on average beginning in September. That 
is certain a welcome change to hear premiums go down instead of 
up.
    But are you aware of why Aetna of Connecticut reduced its 
premium? And I know your testimony talks about large insurers 
having a significant amount of built-up reserves, so they 
should be able to afford some premium reductions. Is that what 
is happening with Aetna of Connecticut or is there some similar 
actions in the near future that we might see form other 
insurers?
    Mr. Rome. Aetna is an example of the MLR in action. In 
order to avoid paying the rebate that they would have been 
required to pay as a consequence of not meeting their MLR 
target, they lowered rates. And they wouldn't have lowered 
rates if they weren't in a position to do so.
    Mr. Pallone. OK, and are we likely to see that with other 
insurers?
    Mr. Rome. I think so, and I think what is important is that 
while we along with others point out the importance, $2 billion 
in rebates could come to consumers. The fact is that the MLR is 
not designed to produce rebates. It is designed to more--
industry and lower premiums.
    Mr. Pallone. All right. Mr. Gardiner, I think I have time 
to ask you a question. As you know, the experience of small 
business with unrelenting health insurance rate increases is 
not surprising nor uncommon. Since 2000, premiums from 
employer-sponsored insurance have grown three times as fast as 
wages. These increases are crippling America's small businesses 
in my opinion, not health reform.
    Over half of the small businesses in the country can't 
afford to offer health benefits to their employees which means 
the majority of uninsured Americans are small business owners, 
their employees or their families. In your testimony you talk 
about a small business owner who was quoted 160 percent premium 
increase from his carrier last year forcing him to change 
plans. So my question is can you talk about how different 
insurance reforms and the exchanges, you know, in the 
Affordable Care Act, will help lower premium increases over 
time, with regard to small businesses?
    Mr. Gardiner. I think that one of the special problems that 
small businesses have faced, while everybody sees medical 
costs, premium costs, going up in the country and it is very 
well documented--small businesses are much more subject to a 
very much annual volatility. You know, every time we have a 
meeting, there is always somebody standing up talking about 
what their premium went up and other people chiming in. And a 
lot of times they can't even find out why their premium went 
up. And you know, we talk about people in the small group 
market. It is even more volatile if you are self-employed. If 
you are one of 22 million self-employed, you experience even 
more premium volatility. And I think we are not really going to 
see that premium volatility come down until the exchanges are 
up--and combined with the insurance reforms. At that point we 
are going to see an ability to level them out.
    So I think the main thing we hear from small business 
owners, can we get these exchanges going sooner because, you 
know, we are going to have to bring those elements together of 
the exchanges and the insurance reforms before we will decrease 
that volatility on a year-to-year basis.
    Mr. Pallone. Thank you very much. Thank you, Mr. Chairman.
    Mr. Pitts. The Chair thanks the gentleman and recognizes 
the gentleman from Louisiana, Dr. Cassidy, for 5 minutes for 
questions.
    Mr. Cassidy. By the way, I enjoyed all the time we had 
together. Now I am intrigued that you brought up Massachusetts, 
because frankly, Massachusetts concerns me. If you will, that 
appears to be the prequel, as someone described it, the beta 
version of Obamacare. Massachusetts appears to be the prequel 
or beta version of Obamacare. And their small group market has 
the highest premiums in the Nation. Now, they started off with 
an uninsured rate of about 10 percent. Now it is about 4 
percent. And the economic drag or something has been 
incredible. Maybe it is not this, but they have actually had a 
negative--I did see that they had a crackdown on their MLR, but 
those are non-profit insurance companies. If you talk to the 
providers and the insurance companies, they say effectively, 
this is like the Soviet Union, that they are being ignored in 
terms of their true expenses. It is just arbitrarily being 
decreased. Clearly you disagree with that, so I just would like 
your response to those kind of ascertations.
    Mr. Rome. I mean, I don't want to spend a lot of time on 
Massachusetts itself because I was citing it as an example of 
rate reductions that have come about because of prior rate 
approval or because of insurance regulators stepping in.
    And so you see that in multiple cases. Certainly California 
had very large rate increases, 39 percent that went to 14 
percent in 2009, looking at North Dakota recently, 27----
    Mr. Cassidy. Can I ask you then, knowing that those exist 
but obviously we may differ in terms of it, I am also 
concerned, I am still a practicing physician in a public 
hospital, and it has always been my observation that 
politicians overpromise and underfund. And there is this 
populace pressure to do something about climbing premiums. Do 
you see any risk that in the future some DHH secretary, 
whatever she is secretary, will say no, thou shalt not increase 
your premium. We are going to disregard this cost structure 
because frankly, it is a political pressure. It is the year 
before presidential reelection, for example, and there is--
increase. Do you see no risk in that?
    Mr. Rome. I don't see any risk in that because there isn't 
any demonstrate that that has occurred to date. There is 22 
States that have prior rate approval. I mentioned the 
California example of auto----
    Mr. Cassidy. Now, wait a second. I think we can look at 
property and casualty rates in Florida and see that there was a 
political response to something which, you know, people 
objected. You are raising our premiums. The actuaries for the 
P&C companies said no, this is reasonable. We have huge 
exposure here.
    Now, you may argue whether Citizens in Florida was a good 
thing or a bad thing, but clearly, that was a political 
response to an outcry which actuaries say is fiscally unsound. 
So there does seem to be precedent for this.
    Mr. Rome. Again, I don't think that there is any 
significant precedent. What there is is a substantial history 
of regulators taking, whether it is on both sides of the aisle, 
taking a cool look at rate hike requests and making judgments 
based on the merits.
    Mr. Cassidy. Let me ask you----
    Mr. Rome. It is an important----
    Mr. Cassidy. I have limited time, so I am sorry to be rude. 
Dr. Harrington, you see where I am going with my line of 
questioning. What are your observations?
    Mr. Harrington. We haven't had detailed statistical 
analyses of the relationship between regulation and health 
insurance and performance metrics like--and the like.
    There have been dozens of studies of the impact of rate 
regulation and workers' compensation insurance and automobile 
insurance. You can have environments where an insurance company 
is in an environment of rapid claim cost growth will ask for 10 
or 15 percent in a politicized environment. Maybe they can 
negotiate a rate increase of 8 or 9 percent. That can go on for 
a period of time. It reduces the company's incentive to write 
new business. It reduces their incentive to provide good 
quality. It reduces their financial strength. But it cannot 
persist.
    The studies that have looked at long periods of time show 
that basically there is no difference by type of regulation in 
these markets, automobile and homeowners' insurance. Now, I 
can't attest to that in health insurance because people haven't 
looked at the data, but I don't think you can look at anecdotes 
for what happened in Massachusetts, for example, because in the 
short run, companies will take a rate increase less than the 
actuarial projection if the alternative is enormous legal 
fees--or having to leave a marketplace.
    I would also just like to say we need to keep our facts 
straight. The California situation was highly publicized. 
Thirty-nine percent was touted all over. The weighted average 
increase was 25 percent. It eventually was only 14 percent, and 
there was--dispute about the numbers and so on. But it is not 
right to compare 39 percent to 14 percent, and it is also not 
right to assume as I said in a particular year if you get a 
lower rate increase because of some regulatory action, that 
that is really consistent with the underlying cost of the 
business in the long run viability of the company.
    Mr. Cassidy. Thank you very much. I am out of time almost. 
I yield back.
    Mr. Pitts. The Chair thanks the gentleman and recognizes 
the gentleman from California, Mr. Waxman, for 5 minutes for 
questions.
    Mr. Waxman. Thank you, Mr. Chairman. Ms. Hayes, Republicans 
have repeatedly claimed that the administration's rule on 
grandfathering plans will lead to people losing their plans. Is 
that true?
    Ms. Hayes. Is it true that Republicans have claimed that? 
Is that the question? I am sorry.
    Mr. Waxman. No.
    Ms. Hayes. Is it true that they will actually lose their 
plans? No, Mr. Chairman. I am sorry, Mr. Chairman. That was a 
slip.
    Mr. Waxman. I won't hold it against you.
    Ms. Hayes. OK. And I apologize, Mr. Pitts, for that slip. 
No, the grandfather rules were established to provide a 
transition for health insurance, and first of all, you know, 
starting with the premise that an individual can keep their 
health insurance, with all due respect to the administration, 
is a false premise to begin with because any day an insurance 
plan could decide that they are no longer going to offer it in 
that market. And it is not so much that an individual I believe 
is so much attached to an insurance policy to begin with or an 
insurance carrier in particular, they are worried about whether 
or not they can continue to see their healthcare providers, 
they are worried about whether or not it is affordable, they 
are worried about what benefits are covered.
    And under the grandfather rules, plans are required to 
meet--but frankly, if the plans change their policy so that 
they no longer meet the grandfather provisions, that is not the 
same policy anymore, either, because if they are losing 
grandfather status, they have made a significant change in 
their benefits. There has been a significant increase in cost 
sharing for beneficiaries, there has been a reduction in 
benefit coverage generally.
    So the grandfather rule protects individuals and they can 
continue to keep the plans they have so long as the carriers 
keep the same----
    Mr. Waxman. Right. Would you say employers won't drop 
coverage just because they may not qualify as for the 
grandfather?
    Ms. Hayes. Oh, absolutely not. I think clearly every 
employer group that I have heard has said that they want to 
continue to offer healthcare benefits because it is an 
important tool for recruiting and retaining personnel. At the 
same time, there are provisions in the Affordable Care Act.
    Mr. Waxman. Let me move on to some others in the limited 
time I have----
    Ms. Hayes. Sure.
    Mr. Waxman [continuing]. Because I wanted to ask Mr. 
Gardiner, Republicans continue to say, and this isn't a 
question of whether they continue to say it, I am asserting 
that they have said over and over again that the Affordable 
Care Act will cost small employers too much. However, we know 
this is not the case. The ACA contains multiple provisions in 
directly at reducing healthcare costs for small businesses and 
ensuring the small businesses, their employees will have access 
to affordable and quality health insurance. In your testimony 
you discuss some very important provisions that are already 
helping millions of small businesses. For example, you talked 
about the small business tax credit that offers a credit of up 
to 35 percent of their health insurance costs. Four million 
small businesses--with the small business tax credit, and early 
evidence suggests that many are already benefitting from it. 
According to a survey by the Kaiser Family Foundation, the 
percentage of small employers offering health coverage has 
risen from 46 percent in 2009 to 59 percent in 2010, in part 
due to the reform's new tax credit. Can you please elaborate on 
how the healthcare tax credit for small business is helping 
create jobs and health security?
    Mr. Gardiner. The direct linkage between the healthcare tax 
credit and any tax credit is that the more money is flung into 
the treasury of a small business, then they have more money to 
invest--for jobs is the fact that over the last decade 70 
percent of the net new jobs have come from small business, and 
you know, there is a lot of other industries out there, and 
they invest in a lot of mergers and acquisitions and increased 
dividends and go offshore and everything. But really, you know, 
small businesses are there because somebody was an 
entrepreneur--that, and they pour their lives and their money 
back into growing their business.
    So when we say that they can get a 35 percent tax credit 
that is going to reduce their cost, that is going to stay, you 
know, in the treasury of their company, and they are going to 
be looking at how to expand their business. And very much like 
this is last year Congress provided the tax equity for self-
employed, the 22 million self-employed, which reduced their 
cost when they purchase healthcare by 15.3 percent. And we 
should keep that in mind as one of the benefits of the overall 
health reform that needs to be retained also.
    Mr. Waxman. I see my time is expired.
    Mr. Pitts. The Chair thanks the gentleman and recognizes 
the gentleman from New Jersey, Mr. Lance, for 5 minutes for 
questions.
    Mr. Lance. Thank you, Mr. Chairman, and good afternoon to 
the panel. A similar vein of questioning as suggested by Mr. 
Waxman, Mr. Fensholt, in your testimony you state that many of 
your clients may lose their grandfathered status, due even to 
modest or routine changes, and I would like to suggest several 
examples and if you would comment on them please, sir.
    Mr. Fensholt. Sure.
    Mr. Lance. A plan increases co-insurance from 5 percent to 
6 percent, and a family believes the plan still provides good 
value for the family. In your judgment, would the plan remain 
grandfathered and could the family keep that type of plan?
    Mr. Fensholt. Well, the plan loses grandfathered status, 
and the issue in my space, in the middle market, large market, 
is that when a plan loses that grandfathered protection, 
additional benefit mandates and requirements drop down on top 
of that plan, and those carry costs. And so the problem as we 
see it with the grandfathered rule, it is--grandfathered rule, 
very modest changes. I think here is where Ms. Hayes and I part 
company. It does not take a significant change in plan design.
    Mr. Lance. So for example, another situation, a co-pay is 
increased for prescription drugs from $5 to $10 or perhaps an 
owner asks her employees to increase their share of health 
premiums from 2 percent to 8 percent. In your judgment, what 
would happen in those situations?
    Mr. Fensholt. In those situations, the plan loses 
grandfathered protection. The additional mandate dropped down 
the plan. The plan incurs the additional cost.
    Mr. Lance. Thank you very much. Ms. Reichel, in your 
testimony you mentioned that the administrative and regulatory 
burdens of the medical loss ratio requirements will put 
significant challenges to employers and health plans.
    In New Jersey where I live, there is a history of 
administering MLRs and overseeing administrative rebates, 
although one--PPACA, we have the situation but not as strict as 
PPACA. I would be interested in your thoughts on what effects 
the stricter MLR and would a State like New Jersey's insurance 
market be challenged in this regard, recognizing that what we 
have in New Jersey is not as strict as what is in PPACA.
    Ms. Reichel. What is in the ACA now I think is going to be 
a real burden on small businesses, and here is why we think 
that. Assume if you will that there is going to be a rebate 
owed to a small business. The insurance company has to do much 
more than simply determine that a rebate is owed to the 
employer and provide that back to the employer. What the small 
employer now, and large employer, too, needs to do in order to 
get that is to provide data to the insurance company that all 
the premiums that the employer has paid, he needs to determine 
what the premiums are that the individuals he employs pays. He 
also has to determine what the percentage of the rebate is 
coming back to the employee, and he has to provide 
documentation to the insurance company that he actually gave--
so the reporting requirements on small employers is much 
greater than it ever was before.
    Mr. Lance. And as a follow-up to that, what if a State has 
never had to deal with the MLR? It seems to me it might face an 
even more significant effect on this market?
    Ms. Reichel. I would think that that would be absolutely 
true, not only from the small employer but also from the 
carrier point of view where a State that has no MLR currently 
in effect, effectively what the companies are doing, he is 
going from zero to 60 immediately, or I guess zero to 80 or 85 
overnight.
    If the State has no medical loss ratio now, then it, in 
effect at the federal level for policies that were in effect 
before the statute was effectively signed. So there is a 
retroactive application of the medical loss ratio. In a State 
where there hasn't been an MLR, I think that that climb is 
really steep for the carriers.
    Mr. Lance. Thank you. I conclude from the questioning and 
from the testimony that it is unlikely that the President's 
promise that Americans can keep their health plan if they like 
it is not accurate, and I think we have to move in the 
direction to making that possible in the greatest number of 
situations.
    Thank you, Mr. Chairman.
    Mr. Pitts. The Chair thanks the gentleman. We will begin a 
second round of questioning here. Mr. Fensholt, in your 
testimony you state that employers' biggest concern about PPACA 
is the massive administrative burden imposed by the law. Do you 
believe that the healthcare law's administrative burden is 
merely a short-term issue for employers as the law's 
implementation has begun or will the law present additional 
administrative headaches for job creators down the road?
    Mr. Fensholt. Oh, it will definitely be the latter, Mr. 
Chairman. This is an ongoing trend at the federal level with 
regard to health insurance and the administrative burdens. 
There are federal rules put on plan sponsors, and I might add, 
by 2014, for example, employers are not only going to have to 
comply with the panoply of existing obligations but they will 
begin reporting to the insurance exchanges the various levels 
of coverage they are offering their employees, what they are 
charging for it, who is eligible for it, who is enrolled in it 
and do this on a regular basis, along with a variety of other 
reports and obligations.
    The irony about these reporting and disclosure obligations 
is that if you look at any one of them individually, they may 
not appear all that onerous. But in the aggregate, none of 
these obligations is a sword thrust to the heart. But in the 
aggregate, you are asking an employer to supply more than 50 
disclosures, notices and reports to the Federal Government. I 
mean, over time this is death by 1,000 cuts to employers. And I 
will tell you, sir, that we have clients who are at the end of 
their rope. Their view is this is just becoming too hard, too 
complicated. The--of the axe hanging over our head is too 
severe. We are not going to want to do this much longer. And 
rather than making that burden easier, health reform makes it 
harder, more complicated and more cumbersome.
    Mr. Pitts. Thank you. Ms. Hayes, in a December 14 
editorial, Secretary Sebelius and Attorney General Holder 
wrote, ``It is essential that everyone have coverage. Imagine 
what would happen if everyone waited to buy car insurance until 
after they got in an accident. Premiums would skyrocket, 
coverage would be unaffordable and responsible drivers would be 
priced out the market.'' Yes or no, do you agree with Secretary 
Sebelius and the Attorney General that if the individual 
mandate is unconstitutional, would premiums skyrocket?
    Ms. Hayes. If it is struck down, would premiums skyrocket? 
I believe that if the individual mandate were not a part of 
this law, it would be more difficult for insurers to continue 
to operate, yes.
    Mr. Pitts. So it is fair to say that you believe that if 
the individual mandate were not in the bill, that would impact 
other parts of the law?
    Ms. Hayes. Yes.
    Mr. Pitts. Anyone. Medicare's plan to prevent fraud and 
abuse has often been described as a pay-and-chase model. Can 
anyone describe how pay-and-chase anti-fraud efforts work? Ms. 
Reichel?
    Ms. Reichel. I have seen people looking down at my end of 
the table. What pay-and-chase means is that once a service has 
been provided, the bill has been sent to the insurance company, 
the insurance company has paid it, there is a retroactive 
application if you would or an attempt to get the money back 
that somebody finds out after the fact has been provided 
fraudulently for a service that didn't occur, for a service 
that shouldn't have occurred, so somebody who wasn't there. 
That is pretty much what a pay-and-chase is as opposed to 
preventing the fraud from occurring in the first instance.
    Mr. Pitts. All right. I am going to at this time yield 5 
minutes to the ranking member for his questions because we are 
voting.
    Mr. Pallone. Thank you. Have we started the vote?
    Mr. Pitts. Yes.
    Mr. Pallone. OK. I will try to be quick. I wanted to ask 
Ms. Hayes about the waivers. You know, Republicans, they spend 
a lot of time complaining about the inequities in the waiver 
process for annual limit requirements. They have made 
allegations that favored political allies of the democratic 
party, particularly unions who were being exempted from all the 
health reform bills, consumer protections and insurance 
regulations. And I think these claims have been wildly--they 
need a lot of consideration here, but for instance, union plans 
were more than five times more likely to be rejected for annual 
limit waivers than were other kinds of applicants--for annual 
limits of policies affect only a small number of people and are 
just one consumer protection of the law.
    Your testimony describes the waivers as a kind of 
transitional policy from today's world to a much more rational 
insurance regime in 2014. Would you just elaborate on that a 
little bit?
    Ms. Hayes. Yes, sir. I have seen no evidence to suggest 
that the administration is granting favors to anyone when it 
comes to waivers. Clearly, Congress anticipated and were warned 
during debate that there were going to be transitional issues, 
and that is built into the law itself. So I don't find it 
particularly surprising that waivers have had to be granted and 
particularly in the area of some of the mini-med plans that you 
have seen out there which I don't think anyone would argue are 
allies of the current administration.
    Mr. Pallone. All right. Thank you. I want to ask Mr. 
Gardiner and Mr. Rome, this is about the Affordable Care Act 
creating jobs because I obviously believe that it creates 
hundreds of thousands of jobs. But the opponents make strong 
claims that the law will kill jobs. They argue that requiring 
employers to offer health insurance and to improve their 
benefits will increase cost of labor. I don't think that is 
true because I think the ACA is in fact helping to create 
thousands of jobs in the public and private healthcare sectors.
    In June 2010 funds were allocated to train more than 16,000 
new primary care providers including physicians, nurses. It 
seems logical that the newly insured 30 million people will 
need doctors, nurses and other healthcare personnel to meet 
their medical needs. I know that the Republicans have said that 
the country may not have enough doctors and hospitals to serve 
these people, but the answer to that is to grow the workforce 
to create more jobs.
    So I just wanted you to comment, one or both of you. Can 
you describe for us how the ACA is a job creator, not a job 
killer, and talk about some of the other factors, just to 
comment on that. I will start with Mr. Rome, I guess.
    Mr. Rome. OK. I would just say two things before Mr. 
Gardiner. I mean, one is that one of the best things that we 
can do to help create jobs is reduce the expenses that 
employers face, and reducing healthcare costs is an important 
and significant part of that. And that is why the MLR, for 
example, which makes insurance more efficient and more 
affordable is an incredibly important part of job creation.
    The second thing is when we do talk about medical 
personnel, simple example. Over the next 10 years, community 
health centers are going to go from treating 20 to 40 million 
people, and that is a substantial change in treatment, and that 
will obviously create jobs in the health sector, as just one 
example.
    Mr. Pallone. Mr. Gardiner?
    Mr. Gardiner. Where we start from is what if we don't have 
healthcare reform? That is what we see as the job killer, and 
that was the study that we had done by MIT to start with. So we 
start from the premise if we don't do something about the ever-
escalating, we are going to lose jobs. And we documented that 
as 178,000 jobs, but I think that is a very conservative 
number. But if we go forward with health reform and reduce 
costs, then firms can invest that money. And in fact, the other 
part that we have to look at is job loss. You have got 42 
million employees at small firms under 100 employees, and it 
has been well-documented in the literature out there that 
people can't leave because they are worried about getting the 
benefit. Of course, this would be any size firm because they 
don't know if they are going to have healthcare where they go, 
especially when we have half of the small employers not 
providing it, and that is a shrinking base.
    So employees can't move. They are unhappy. Everybody who 
has been an employer knows that that is not a good thing, that 
when an employee wants to move, they ought to be able to move. 
But it also applies to people starting companies, 
entrepreneurs. Why is somebody going to take the risk to leave 
a good job with good benefits and go out there and be a self-
employed person, a start-up company, and then find out how 
expensive and how unattainable healthcare might be for them. So 
there are several ways that having healthcare available and 
having it more affordable and less volatile is going to help 
small businesses grow and make it easier for people to start 
companies.
    Mr. Pallone. Thank you. Thank you, Mr. Chairman.
    Mr. Pitts. The Chair thanks the gentleman. That concludes 
our first panel. The Chair thanks the witnesses for their 
testimony, for their patience. Despite the interruption, it was 
an excellent panel, excellent testimony.
    The subcommittee will take testimony from the second panel 
at a date to be determined. The subcommittee is now in recess.
    [Whereupon, at 5:17 p.m., the subcommittee was recessed.]



 PPACA'S EFFECTS ON MAINTAINING HEALTH COVERAGE AND JOBS: A REVIEW OF 
             THE HEALTH CARE LAW'S REGULATORY BURDEN--DAY 2

                              ----------                              


                        WEDNESDAY, JUNE 15, 2011

                  House of Representatives,
                            Subcommittee on Health,
                          Committee on Energy and Commerce,
                                                    Washington, DC.
    The subcommittee met, pursuant to call, at 3:00 p.m., in 
Room 2322, Rayburn House Office Building, Hon. Michael C. 
Burgess presiding.
    Present: Representatives Burgess, Rogers, Gingrey, Latta, 
Cassidy, Guthrie, Pallone, Towns, Capps, and Waxman (ex 
officio).
    Staff present: Brenda Destro, Professional Staff Member, 
Health; Paul Edattel, Professional Staff Member, Health; Julie 
Goon, Health Policy Advisor; Jeff Mortier, Professional Staff 
Member; Katie Novaria, Legislative Clerk; Debbee Keller, Press 
Secretary; Alli Corr, Minority Policy Analyst; Tim Gronniger, 
Minority Senior Professional Staff Member; Purvee Kempf, 
Minority Senior Counsel; Karen Lightfoot, Minority 
Communications Director and Senior Policy Advisor; Karen 
Nelson, Minority Deputy Committee Staff Director for Health; 
and Mitch Smiley, Minority Assistant Clerk.
    Mr. Burgess. The committee will come to order. This is a 
continuation of a hearing that actually began 2 weeks ago. The 
opening statements have already been given by the members on 
the committee, and so today we will conduct our hearing on the 
regulatory burden of the Patient Protection and Affordable Care 
Act.
    We do welcome our only witness today, Steve Larsen, 
certainly no stranger to the committee. We welcome you back, 
sir. We are always glad to have you.
    He is the Director of Consumer Information and Insurance 
Oversight for the Centers for Medicare and Medicaid Services.
    Once again, we want to thank Mr. Larsen for agreeing to 
appear before our committee and the willingness to accommodate 
changes in schedule. We understand you, sir, have some other 
considerations today. There is likely to be a set of votes on 
the House floor sooner rather than later.
    So with that, why don't we proceed directly to your opening 
statement in the interest of time.

   STATEMENT OF STEVE LARSEN, DIRECTOR, CENTER FOR CONSUMER 
 INFORMATION AND INSURANCE OVERSIGHT, CENTERS FOR MEDICARE AND 
                       MEDICAID SERVICES

    Mr. Larsen. Thank you, Mr. Chairman, Ranking Member 
Pallone, members of the subcommittee. Thank you for the 
opportunity to discuss CCIIO's progress in implementing the 
Affordable Care Act, and I have submitted my full written 
statement for the record.
    I am pleased to have the opportunity to describe the new 
programs that CCIIO has implemented under the ACA, programs 
that have been implemented in an open, transparent and balanced 
manner.
    When fully implemented in 2014, the ACA will expand access 
to affordable quality coverage to over 30 million Americans. By 
increasing competition among private health insurers and 
reducing barriers to coverage, individuals will have coverage 
when they need it most. In the meantime, the reforms in the 
Affordable Care Act we have already implemented provide a 
critical foundation of patients' rights in the private health 
insurance market. Now, for example, consumers can get better 
information about available health care options in their State 
on healthcare.gov, and based on provisions which allow 
dependents under age 26 to have coverage under their parents' 
policies, over 600,000 young adults now have access to care.
    CMS has worked to manage different statutory implementation 
schedules for these and other provisions, while still seeking, 
considering and accommodating public input and comment. CCIIO 
received and considered input from consumers, industry, States 
and other stakeholders through formal requests for comment and, 
in some cases, public forums, as we prepared our regulations 
implementing these programs.
    Importantly, in each regulation issued, we seek to secure 
the protections intended by Congress in the most economically 
efficient manner possible, and we undertake a careful balancing 
of costs and benefits and examine regulatory alternatives.
    As a result of these processes and the feedback received by 
CMS, the regulations that we have issued to implement the 
Affordable Care Act have been strengthened by the views and 
opinions expressed by stakeholders and, again, reflect a 
balanced approach to implementation.
    For example, CMS issued the final rate review regulation in 
May after reviewing and considering more than 60 comments 
received on the proposed rule issued in December. The final 
rule includes several changes to the proposed rule that reflect 
the comments that we received. For example, based on public 
input, the final rule clarifies that CMS will work actively 
with States to develop State-specific thresholds beginning in 
September 2012 for the rate-review process, and this ensures 
that the rate-review process is based on the insurance and 
health care cost trends in each particular State.
    We also extended the startup date for the new rate-review 
process until September. We also modified the requirements for 
what constitutes an effective rate-review process in the States 
based on comments that we received from the industry and State 
regulators.
    Another program that reflects our balanced approach to 
implementation is the medical loss ratio regulation. In order 
to ensure consumers receive value for their premium dollars, 
the ACA establishes minimum standards for spending by insurance 
companies on clinical services and quality-improvement 
activities for their members. In December of 2010, we published 
an interim final regulation with the 60-day comment period 
implementing the MLR provisions of the ACA.
    The interim final regulations certified and adopted the 
recommendations submitted to the Secretary by NAIC. And, 
importantly, the NAIC process included significant input from 
the public, from States and other key stakeholders, and was 
widely praised for its openness and transparency.
    The MLR regulation we issued struck a balance among the 
interests of many affected groups and took into account the 
potential costs and benefits of the regulation on affected 
parties. Some of the provisions that may have been burdensome 
on small plans or new health plans were modified, and pursuant 
to specific provisions in the ACA, we established a process to 
allow States to seek a modification to the MLR standard in the 
individual market in order to allow an orderly transition for 
health plans to the new MLR standards. And this process 
provides flexibility to the States in how they implement the 
ACA.
    In implementing the provisions of the Affordable Care Act 
in the future, CCIIO will continue to work closely with all 
interested stakeholders and to use the transparency of the 
regulatory process to ensure the new law serves the American 
people in an economically efficient manner.
    We are proud of all that we have accomplished over the last 
year and look forward to 2014 when Americans will have access 
to more affordable comprehensive health insurance plans. And 
thank you for the opportunity to discuss the work that CCIIO 
has been doing to implement the Affordable Care Act.
    Mr. Burgess. Thank you, Mr. Larsen, for your testimony.
    [The prepared statement of Mr. Larsen follows:]
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    Mr. Burgess. We will now, as is customary, take questions 
from the dais. We will alternate between Republicans and 
Democrats. Without objection, I will begin.
    Now, you have been here in our subcommittee before, and the 
last time you were here, I asked and you agreed to provide a 
detailed budget. To date, I have only received some net totals 
for your obligations, such as the amount spent on the early 
retiree reprogram.
    What we have discussed was a detailed budget that included 
all of your sources of funding and how those dollars were 
spent, and I have had both your word and Secretary Sebelius' 
word that this would be forthcoming, and I think I have been 
more than patient. When could the committee look forward to 
seeing action on this request?
    Mr. Larsen. Well, thank you for your question. I think we 
have submitted, I think, two responses, and I apologize if you 
don't feel they are fully responsive. I think we submitted kind 
of our spending to date, I think, as of March, and then our 
2011 and 2012 budget.
    But we would be happy to provide you with more detail. I 
don't know if you have provided--your staff has provided us 
with the specific level of detail that you would like, but if 
they have, I will certainly, after this hearing, talk to them 
to make sure we get you what you have asked for.
    Mr. Burgess. Well, just to refresh your memory a little 
bit, during that first hearing that we had, there was some 
concern--and I believe Mr. Engoff appeared with you at that 
hearing--and the questions were surrounding how did you know--
in February of 2010, a month and a half before the bill was 
signed into law, how did you know what your startup expenses 
were going to be?
    In other words, there was money written into the bill--when 
the legislative product was still a bill, there was money 
written in. And it almost seems like people were hired prior to 
the bill becoming law. So we were interested in how those funds 
were allocated, what they have been used for, what amount of 
money that was allowed for that initial allocation for startup 
costs remains unspent, just trying to get some finer detail on 
where the dollars came from and where they have ended up.
    So, again, I apologize if we have not provided you that.
    Mr. Larsen. I apologize if we have not been responsive, and 
after this hearing we will convene and determine how quickly we 
can get that information to you.
    Mr. Burgess. Very well.
    On the issue of the high-deductible health plans, I noticed 
in one of the publications that comes out here on the Hill 
every morning, yesterday's Politico Pro talked about how the 
number of people signing up for high-deductible health plans, 
HSAs, if you will, has increased. And I don't remember whether 
the number was 14 or 18 percent, but it was a significant 
increase.
    Now, many of us are concerned, as the rollout of the 
Patient Protection and Affordable Care Act becomes 
established--these programs, high-deductible health plans, are 
extremely popular. In fact, President Obama himself, when the 
Republicans were down at the White House a few weeks ago, told 
us a little vignette about some dermatologic preparation he had 
been prescribed during the campaign. It worked a little bit, 
not all that great, so he got it refilled. He had a little 
prescription card. It cost him 5 bucks for every prescription. 
But when he was out on the road, he ran out, went to the 
pharmacist, explained his difficulty. The pharmacist called the 
doctor; they got everything straightened out as to what 
prescription he needed. The pharmacist bagged it up and handed 
it to him and said, ``That will be $400.'' And the President 
said, ``You know, this rash is not that bad.'' And at that 
point, the President became an informed consumer and responded 
to a very clear market signal that the rash wasn't that bad, 
and $400 was not a necessary expenditure.
    That is why so many of us really like the concept of people 
being able to control their own money for health care 
expenditures. Mitch Daniels, in Indiana, allowed that. 
Something magic happens when people spend their own money for 
health care, even if it wasn't their own money in the first 
place. That is, his State employees, where he funded a high-
deductible health plan and funded the health savings account 
part of that, people tended to be very cost-conscious 
consumers. And as a consequence, he held down costs for his 
State employees by 11 percent over 2 years at the same time 
regular PPO, Medicare, Medicaid were increasing at 9 percent to 
double-digit increases every year. So it is something worthy of 
our consideration.
    So what kinds of assurances can you give me, to those 
millions of people who have high-deductible health plans, that 
they will still have access to this as a health coverage 
option?
    Mr. Larsen. Well, I guess I would respond this way. I 
suspect there are a number of different reasons why people 
elect those plans. One is that I think it demonstrates the 
manner in which the current market is broken and, for many 
people, unaffordable, so that the only way they can get, you 
know, catastrophic-type coverage is to pay out of pocket up to 
particular limits.
    I think many people end up purchasing these types of 
policies because, frankly, that is maybe what they can afford. 
It may not be what they want. I am not sure many people want to 
have to pay out of pocket the thousands of dollars that they 
may have to for a high-deductible plan. But in the current 
health care environment, prereform pre-2014, that may be your 
option. But we find that most people actually want 
comprehensive coverage for their cost.
    Mr. Burgess. Actually, the reason to have a high-deductible 
health plan and spend your own money and control your own money 
through a health savings account is to be in control of health 
care. When I spend money off of Visa debit cards that I have 
for my health savings account, no one in the government, no one 
at Aetna, no one at CIGNA tells me what to buy and where to buy 
it. I make those decisions myself. So I would also argue that 
there is an issue of control.
    Can you just briefly tell me under the medical loss ratio 
rules that you are doing, are those contributions to the health 
savings account, are those counted as actual clinical expenses?
    Mr. Larsen. I would have to confirm that back with you, 
because that is a level of detail for the reg that is escaping 
me for the moment.
    Mr. Burgess. I would appreciate you getting back to me.
    I will yield now 5 minutes to the ranking member of the 
subcommittee, Mr. Pallone of New Jersey.
    Mr. Pallone. Thank you, Mr. Chairman. I was listening to 
you, though I am not sure that I agree that it makes sense for 
people to forego treatment because it costs them more. But 
whatever, I am not going to get into that today.
    I want to ask Mr. Larsen, one of the witnesses, I guess, at 
the previous hearing characterized the medical loss ratio 
regulation as ``costly bureaucratic interference with insurers' 
legitimate business decisions.''
    And yet Consumer Reports calls the rate review rules a big 
win for consumers because insurers are going to have to start 
spending more on health care due to this new medical loss ratio 
that requires every insurance company to have a medical loss 
ratio of no less than 80 percent for individual and small group 
plans and 85 percent for large group plans. I don't understand 
how anyone could accept a situation in which insurers spend 
one-half or one-third of their health insurance premiums on CEO 
salaries, profits and administrative costs, and yet we have 
seen that situation in the private market.
    So my question is can you tell us what benefit you see from 
setting some restrictions on what portion of the premium 
insurance companies are able to spend on overhead and 
administrative costs? Have you seen any benefits to date as 
insurers implement these new rules? And what about the process 
through which the MLR rules were adopted; what was the role of 
the National Association of Insurance Commissioners?
    Mr. Larsen, I have to tell you, and, you know, we are 
continuing the previous hearing, I don't really understand how 
anyone could argue that these medical loss ratios are not a 
good thing. But in any case, if you could answer those 
questions.
    Mr. Larsen. Sure, I would be happy to. And I think that is 
a good example of a regulation and a program where the benefits 
so far outweigh the costs. I mean, first of all, when we looked 
at the economic impact of this as a percent of the premiums 
that health insurers issue, it is a very, very small 
percentage. They are already preparing this type of information 
for the NAIC filing. So it was a very small incremental 
portion.
    Compare that with, for example, the estimates that both the 
NAIC and, I think, many Wall Street analysts have issued 
regarding the potential for rebates to consumers if this law 
had been in effect in 2010, which, depending on the estimate, 
is either 1.5- or $2 billion. And that dollar amount reflects 
the value that will go back to consumers when this law is in 
effect in terms of a rebate for 2011. So when you weigh the 
costs and benefits of that, I think it is so clearly to the 
advantage of the consumers and not burdensome to the industry.
    And in terms of the process that was followed, you know, we 
adopted the recommendations of the NAIC. And I think, as we 
have testified to before, the NAIC followed a very open, 
transparent, thoughtful, thorough, considerate process, which 
is why we were comfortable adopting their recommendations.
    Mr. Pallone. All right, thank you.
    Now, the other regulation the Republicans are attacking in 
this hearing is the rate-review regulation that requires that 
insurance companies explain and disclose publicly any premium 
increase over 10 percent for a given year. Last year, before 
the new rate-review process went into place, several State 
regulators had success in challenging insurance on rate 
increases and actually reversing them. I won't give you the 
examples, although we have several.
    Again, Consumer Reports' Health News calls the rate-review 
rules a big win for consumers because insurers who want to 
raise rates by more than 10 percent have to say so to the 
public. Even in States where regulators can't deny insurance 
premium increases, this transparency gives consumers the 
ability to make better decisions.
    So can you tell me about how Federal rules will relate to 
these ongoing State review efforts? I am sure you have heard 
the Republicans' charges the new Federal rules are duplicative 
of State efforts. Do you agree with that?
    Mr. Larsen. I don't. We think, and I think the NAIC agrees, 
that the rate-review regulation is really a supplement to 
existing State laws. And, as you know, I am a former 
commissioner, the Secretary is a former insurance commissioner. 
We are particularly sensitive to the role that States play and 
historically have played in regulating rates. So the rate-
review regulation is really a supplement to existing processes 
to ensure that really in States where there isn't a robust 
rate-review process, the consumers can get that process where 
they might not get it today. But we are not taking the place of 
what States are doing today.
    Mr. Pallone. The last thing, I don't have much time here, 
but--you know, but we heard charges again from the Republicans 
on the committee about the waivers to the--you know, bias in 
granting waivers to the annual limits on essential benefits 
coverage, particularly with regard to unions, you know, 
favoritism and all of that. And I know the GAO report that came 
out said that that simply wasn't true. So I just--I have a few 
minutes. If you could just comment on these allegations that 
have been made of cronyism with regard to the waivers.
    Mr. Larsen. Well, I am happy to do that. As you know, I 
have testified here and other forums previously, including 
under oath, that we have applied the regulatory criteria to the 
waivers in a manner without regard to politics or favoritism in 
any way, shape or form.
    As you indicated, I think the GAO report confirmed in the 
sampling that they took and the data that they looked at that 
when we reviewed these applications, we applied the criteria 
that we have published on our Website and that are available to 
applicants.
    So, you know, again, I don't know how else to say it. There 
are no facts that support that, they have no merit, and I think 
that I have said it, and I think the GAO came to the same 
conclusion.
    Mr. Pallone. Thank you.
    Thank you, Mr. Chairman.
    Mr. Burgess. The gentleman's time has expired.
    We will recognize now Mr. Guthrie from Kentucky. Five 
minutes for questions, please.
    Mr. Guthrie. Thanks for coming. I would just ask you a 
question based on you just said you were an insurance 
commissioner. I forget which State.
    Mr. Larsen. It was Maryland.
    Mr. Guthrie. Maryland, oK. And then also the Secretary. And 
waivers, sort of the kind of theme that I was going to ask you. 
On the loss ratios, I know that Kentucky is a State that has 
asked for a waiver.
    Mr. Larsen. That is right.
    Mr. Guthrie. And I know that it is what, 80 percent for 
small plans----
    Mr. Larsen. And individuals.
    Mr. Guthrie. And individuals; 85 percent for large 
companies.
    Mr. Larsen. That is right.
    Mr. Guthrie. Some States are lower. I think Maine has a 
waiver, or Nevada----
    Mr. Larsen. That is right.
    Mr. Guthrie [continuing]. Has a waiver with changes. And 
one other. Delaware. Not Delaware, they are asking----
    Mr. Larsen. New Hampshire.
    Mr. Guthrie. New Hampshire.
    In, I guess, the deference to State insurance 
commissioners, because I know our insurance commissioner is 
asking for the waiver believing that it would be disruptive of 
the market if we have to go to 80, 85 percent, and so as a 
former insurance commissioner, why is there more deference 
given to that instead of the Federal 85 percent, 80 percent?
    Mr. Larsen. Well, you know, the Affordable Care Act set up 
kind of a baseline of the 80, and the 85 for the large group. I 
think that the statute specifically recognizes the possibility 
that an immediate transition in some States to the 80 could be 
disruptive. And so the statute provides for this modification 
process. I have to say it is not really a waiver because we can 
set a new number, but you are not--companies aren't waived from 
the general MLR requirements.
    But I guess my point is that the Affordable Care Act 
specifically recognizes that there may be individual cases 
where flexibility is needed. And so, you know, I think we set 
up a process that was fairly straightforward for the 
commissioners to apply. You know, every State is different, and 
we have got, you know, 10 or so pending applications, and I 
think we are pretty close to moving on Kentucky.
    Mr. Guthrie. Yes. I think in the final rule, or the interim 
final rule, I can't think--the individual market can be--if a 
State has to say I have a reasonable likelihood to disrupt the 
market, they can--not a waiver but----
     Mr. Larsen. Right. A modification adjustment, just for an 
individual market.
    Mr. Guthrie. And would that not--you don't think that 
supplies the small--we have a lot of problems in Kentucky with 
individual markets and even small markets where people 
purchase. The ERISA plans and larger, of course, are separate.
    Mr. Larsen. Yes. I know that--I mean, I am aware that there 
has been concern expressed about the impact on the small group 
market. I mean, we haven't read the ACA to kind of permit the 
same type of adjustment in the small group market.
    Mr. Guthrie. But the same negative effects could happen to 
the small group that would happen----
    Mr. Larsen. Personally I think it is much less likely, and 
I am presuming that is why the ACA didn't provide for the same 
type of accommodation to the small group market. The individual 
market is typically very fragile. A number of States have gone 
through disruption in their individual market. And so I am 
assuming that is why that provision was put in.
    Mr. Guthrie. I have got a couple minutes, and why don't I 
get to one more. The loss ratio, the agent's fee is part of the 
loss ratio?
    Mr. Larsen. Yes.
    Mr. Guthrie. And we have had the National Association of 
Health Underwriters survey. Agents are seeing income losses 
from 20 to 50 percent, and 20 percent of agents have said they 
have downsized their business in response.
    And my question is the decision of including the agent's 
fee into the--I think that was an administrative decision, not 
in the ACA.
    Mr. Larsen. It was not.
    Mr. Guthrie. The negative impact on jobs.
    Mr. Larsen. Yes. I mean, the manner in which the MLR is 
calculated, we took almost 100 percent our guidance from the 
very deliberative process that the NAIC conducted.
    And although they expressed some concern about the 
potential impact on agents and brokers, they did not--in their 
recommendations to us did not recommend that the commissions be 
pulled out. Now--and so we adopted their recommendations, and 
that is in the interim final rule.
    We certainly, as part of the administration--and we 
recognize the important role that agents and brokers play in 
the community, we acknowledge that. As we sit here today, my 
understanding is that the NAIC has taken up this issue, and 
they have done some preliminary work on that. So we are 
monitoring the type of work that we are doing, and we look 
forward to seeing whether they ultimately make recommendations 
to pull or make changes.
    Mr. Guthrie. So I understand you are actually engaging 
agents and brokers now to try to----
    Mr. Larsen. We have met with them.
    Mr. Guthrie. I am into the high-risk pool, so----
    Mr. Larsen. Yes.
    Mr. Guthrie. You see the value of what they do.
    Mr. Larsen. Yes. We are moving towards paying commissions 
to agents and brokers for the high-risk pool, and I do want to 
point out, not to belabor it, but the modification process that 
we were talking about early, one of the criteria for whether a 
market is destabilized that we took at the suggestion of the 
NAIC was whether there was going to be diminished access to 
agents and brokers. And some States have asserted that that 
might be the case if we were to apply the 80 percent, it is 
part of their application. So we are looking at that issue.
    Mr. Guthrie. I appreciate that. I appreciate that answer. 
Thanks.
    I yield back my 5 seconds.
    Mr. Burgess. Thank you.
    The chair recognizes the ranking member of the full 
committee Mr. Waxman. Five minutes for questions, please.
    Mr. Waxman. Thank you very much.
    Mr. Larsen, good to see you again. I think you have 
attended this subcommittee--I think you have a better 
attendance record than I do, so good to see you again.
    Republicans, some Republicans, have repeatedly claimed that 
the grandfathering rule issued by HHS will result in tens of 
millions of people losing their health care. That is, of 
course, contrary to the spirit of the Affordable Care Act, that 
if you like what you have, you can keep it.
    Is it accurate to say, as some are saying, that the 
grandfathering rule will result in people with employer-
sponsored coverage being denied or losing their health 
insurance coverage because of HHS or by their employer?
    Mr. Larsen. No. We don't see that happening.
    Mr. Waxman. So where would Republicans get the idea that 
tens of millions of people are losing their health care?
    Mr. Larsen. I don't know. I think the only point is that 
there are, you know, estimates that we have made about the 
transition from some health plans that may decide to make 
changes to the provisions, and they may not continue to be 
grandfathered health plans. But that doesn't mean that people 
won't be able to continue their coverage under those plans.
    Mr. Waxman. Well, it appears to be another case where 
Republicans are inventing problems allegedly caused by the 
Affordable Care Act. And even if plans do lose grandfathered 
status, that doesn't mean a person loses his or her health 
insurance. In fact, they gain some consumer protections like 
rights to external appeals and coverage of preventive services.
    In any case, these requirements will not be prohibitive for 
employer plans because they usually already meet the rules. In 
fact, one employer benefits consultant noted that, quote, 
``Large companies realize they already comply with many of the 
requirements of nongrandfathered plans, so the changes they 
will need to make aren't likely to add a significant cost or 
administrative burden,'' end quote.
    Opponents of the Affordable Care Act, there was a recent 
study, Mr. Larsen, from McKinsey & Company that claims that a 
significant number of employers will stop offering insurance to 
their workers in 2014. However, other well-respected 
organizations have examined whether employers will continue to 
offer coverage, and they have come to different conclusions. 
The RAND Corporation, the Urban Institute, and Mercer all 
conducted studies and found that the percentage of employees 
offered insurance will not change significantly. In addition, 
nonpartisan experts, including CBO, have predicted that 
employer coverage will not be affected significantly by the 
Affordable Care Act.
    What is your take? Are employers likely to drop coverage 
once exchanges and tax credits are available?
    Mr. Larsen. Well, we certainly don't think they will and 
expect--we don't expect that they will. As you have pointed 
out, I think it was the RAND study that, in fact, predicted 
that the number of small businesses and employees of small 
businesses that would have coverage would increase 
significantly thanks to the efficiencies of the Affordable Care 
Act, and I think Mercer, you know, concluded in many respects 
it was a little early to tell, but ultimately also said that 
they did not expect plans to stop offering employer-based 
coverage.
    Mr. Waxman. On June 2, 2011, Ms. Reichel testified on 
behalf of the America's Health Insurance Plans, or AHIP, during 
the first part of the hearing and suggested that HHS adopt a 
one-size-fits-all for the 3-year transition to the 80 and 85 
percent standards for medical loss ratios for all health plans. 
Currently HHS has in place a State-by-State waiver process set 
forth in law to respond to situations in specific States where 
an individual market is highly concentrated and the MLR could 
destabilize the market. HHS has approved waiver requests from 
three States for modifications of the MLR standards and is 
considering several more.
    Can you tell us what goes into the decision as to whether 
to grant a waiver for a State's individual health insurance 
market from the MLR requirements?
    Mr. Larsen. Sure. And I, you know, will say to start out 
that, you know, every State is different. And I think that is 
why this system works well, because some States don't need a 
waiver. It is obvious that some States haven't requested a 
waiver.
    So the idea of having a national waiver would deprive a lot 
of consumers of the value of the law when a modification, 
excuse me, wasn't necessarily needed.
    But to answer your question, the basic test is whether a 
market is likely to be destabilized if the 80 percent were to 
be applied to the individual market, and really we look at 
whether it is likely that a small insurance company that might 
be running substantially below 80 would decide to leave the 
market. And then we look at whether there are other coverage 
opportunities if that insurance company were to leave the 
market. And as you mentioned, we agreed with the application 
from Maine and made, I think, minor modifications to the other 
two applications.
    Mr. Waxman. So these decisions are more nuanced from place 
to place.
    Mr. Larsen. Yes.
    Mr. Waxman. Some States will need a transition; some States 
won't. We shouldn't prejudge the waiver application by 
instituting a national transition policy.
    Mr. Larsen. That is right.
    Mr. Burgess. The gentleman's time has expired.
    I now recognize the gentleman from Michigan. Five minutes 
for questions, please.
    Mr. Rogers. Thank you, Mr. Chairman.
    Although I am not surprised that the gentleman from 
California makes the argument that people who are grandfathered 
won't lose their insurance, and, in his words, all this is a 
little nuanced, but what you will have is you will have 
millions of Americans who don't get to keep the health plan 
that they like, as was promised; will get a health plan that is 
far more expensive and they don't want, courtesy of the Federal 
Government.
    To say that that is nuanced is ridiculous. And to say that 
we are not going to have companies make the choice not to 
provide insurance is not based on any reality, and certainly 
isn't by anybody who actually owns and works and operates a 
business anywhere in America.
    I am just shocked that the conclusion is, oh, they are just 
going to do it. I just talked to a restaurateur today, a woman 
who has been in the business for 15 years, who hits the 30-
employee threshold not with full-time employees, but because 
she has so many part-time employees in a restaurant, who said, 
if this were put into place, my business is gone. I have no 
choice but to stop health care for the five people that I 
provide it for today. And you will see that again and again and 
again. I mean, she was literally in tears talking about what 
this bill does to her and the people she cares about that she 
considers her family.
    So what you, sir, would call nuanced, I call a disaster, 
and it is happening today.
    And I want to talk about the MLR. It gets my blood pressure 
up because I know these people, and they are absolutely in a 
state of panic about how they are going to do this. And their 
only other real option is to drop health care coverage; say, 
good luck, go buy it at the Federal exchange. I hope it works 
out for you. Man, just an incredible outcome that we would be 
so callous toward these--in this case she is a single woman, 
business entrepreneur, trying to make it happen. Apparently 
those people don't count anymore.
    Before I get to my questions, I did want to say a couple of 
things on the MLR and why it has created such a desperate 
economic situation for health care agents and brokers. And, by 
the way, these small businesses who count on these brokers to 
navigate what is already a complicated system now are losing 
this option on something that will even be more complicated 
with hundreds of thousands of pages of rules and regulation and 
law that they don't understand, and that is why they hire 
brokers and agents to try to get them the best deal that they 
can.
    But what should raise some red flags with every member of 
this committee, a regulation from President Obama's health care 
law is single-handedly crippling an entire segment of our 
economy. And this isn't myth, this isn't speculation, it is 
happening today.
    Let me tell about these people. Most health care agents are 
small business owners, and their average income is $50,000 a 
year. I don't know about you, sir, but I don't consider that 
wealthy. They help other employers navigate complex health 
insurance markets and essentially serve as the HR department 
for small business owners. They provide incredible value to our 
health care system and the employer community, especially the 
small business community.
    These agents are brokers. They are very real people. They 
are business owners. They are small. They tend to be 
independently owned. They are in our communities, and they are 
losing jobs today, today, because of this rule, and HHS knows 
it, I know it, and thousands of agents and brokers who have had 
to close their doors certainly know it.
    Yet HHS has refused to address this issue. They have 
ignored the job loss, turned a blind eye to real families who 
are suffering under the weight of this regulation. This is 
unacceptable, and this committee should take action to protect 
these jobs and protect an industry that provides a service. The 
fix is simple, and HHS could do it today, and I am baffled they 
have ignored this problem for so long.
    I have a bipartisan bill which would force change in the 
MLR rule that would protect these agents and brokers from this 
job-killing regulation. It has 90 cosponsors, including 15 
Democrats and 23 members of this committee. I hope we can take 
action on this legislation soon. It is an immediate jobs crisis 
in our communities for thousands of hard-working small business 
owners who are already being crushed by the weight of this new 
health care law.
    I want to thank you, Mr. Chairman, for having this hearing.
    I just want to ask you, sir, there was a letter; you 
mentioned the NAIC and their effort here. One of the 
provisions--and I have a letter here that was directed to 
Secretary Sebelius, and I just want to quote from this letter: 
The role of insurance producers, agents and brokers will be 
especially important--as we move forward. We encourage HHS to 
recognize the essential role served by the producers and 
accommodate producer compensation arrangements in any MLR 
regulation promulgated.
    We have heard again and again that you are going to do 
something for these people who are getting crushed right now. 
We see nothing. Can you help me understand where we are at and 
what you are going to do to protect these jobs and these people 
who are providing these services?
    Mr. Larsen. Sure, and I appreciate your concern. And as I 
indicated earlier, we also believe that agents and brokers play 
an important role in the health care market today, and they 
will in the future when we have exchanges in 2014.
    The NAIC originally did not make any recommendations to 
pull the commissions out of the MLR calculation, and we adopted 
their recommendations, but also adopted recommendations to 
permit the State modification application for the MLR to flag 
this issue of diminished access to agents and brokers.
    As we sit here today again, the NAIC, I think, is doing 
what they do best and what they did for the MLR, which is 
conduct an analysis and a study of the data that is available 
on agent and broker commissions and look at possible solutions. 
And we are monitoring that, and we look forward to 
recommendations that they make--they may make based on the data 
that they collect.
    Mr. Rogers. Just, lastly, let me just get this last point 
in, if I may. Seventy percent of health insurance agents and 
brokers have lost income today. Twenty percent have been forced 
to lay off workers today. Fifteen percent have closed their 
doors today.
    We don't have time for nuance. We don't have time for 
looking at it and studying it and being calm about it. We need 
you to get as upset as the rest of us for real Americans are 
losing their jobs today.
    I would hope that you would take a little urgency here, 
sir. You are going to have your job tomorrow and at least for 
the next 18 months. I would encourage you to worry about the 
rest of Americans who have to get up and innovate their way to 
their livelihood for their families.
    And I would yield back.
    Mr. Burgess. The gentleman's time has expired.
    The gentleman from New York is recognized for 5 minutes.
    Mr. Towns. Thank you very much, Mr. Chairman.
    Let me begin by saying, first of all, you have talked to 
the stakeholders, and they have been involved in terms of this 
process, and I raise that question because of, you know, the 
comment was made by the gentleman from Michigan. You talked to 
stakeholders and referenced it as you moved forward; am I 
correct?
    Mr. Larsen. Yes, absolutely.
    Mr. Towns. Right. What has HHS done to assist States in the 
establishment of health insurance exchanges?
    Mr. Larsen. We provided assistance in any number of areas, 
first of all with different types of implementation grants, for 
them to do the types of studies they need, whether it is IT, 
you know, plan qualification. So planning and implementation 
grants, innovator grants to a small number of States that are 
particularly progressive on the exchanges.
    And then I can't tell you how much technical assistance and 
dialogue we have back and forth with the States, both 
individually and collectively, at events like the NAIC and NGA 
meetings and other forums that we have pulled together. So it 
is a continual dialogue with the States to help them as they 
make the decisions that they need to make to implement 
exchanges by 2014.
    Mr. Towns. You know, I am still thinking about the comments 
that were made on the other side. Did you incorporate any of 
the feedback coming from the stakeholders?
    Mr. Larsen. We did. We do that on a continual basis. We put 
out, I think, either an RFI or RFC initially to get feedback 
from the States, and we have incorporated many of the comments 
that we got from the States in our subsequent guidance, both 
general guidance and technical guidance. We put out some IT, 
information technology, guidance as well. So I think it has 
been a very collaborative and iterative process with the 
States.
    Mr. Towns. Mr. Chairman, I am going to yield to the 
gentlewoman from California because I understand we have a 
vote, and I just want to share my time with her. I saw the 
expression on her face.
    Mrs. Capps. Well, thank you very much. I thank my colleague 
for yielding me time, and I will try to repay the courtesy one 
day.
    I am going to switch gears just for a minute because there 
are so many criticisms that we have been hearing which ignored 
the state of the health insurance market before the Affordable 
Care Act was passed. I think we need sometimes to remember what 
it was like.
    As you remember, as most of us remember, consumers would 
think that they were covered for things like emergency room 
care, prescription drugs or lab tests. But then when they tried 
to use it, they found they weren't covered. The phenomenon was 
``I like my health insurance until I have to use it.'' But what 
were we paying high premiums and out-of-pocket costs for?
    One area that I found particularly appalling is the lack of 
maternity care coverage to women who need it. Unfortunately 
maternity coverage was largely unavailable in the individual 
market. In fact, in 2009, according to a study conducted by the 
National Women's Law Center, barely 1 in 10 individual market 
plans available to 30-year-old women across the country 
provided maternity coverage. Most people didn't know that until 
they got pregnant, despite the obvious fact that more than 1 in 
10 women are likely to want or need maternity coverage. This is 
all while women were charged more for their health plans for no 
reason except for her gender, and most Americans didn't realize 
that either. They just paid their premiums and didn't realize 
that women were getting charged more than men because they were 
women.
    To me, this is a perfect example of why we need an 
essential benefit package, and I am happy to report that thanks 
to the ACA, starting in 2014, women will be able to get the 
coverage they need.
    So would you use 1-1/2 minutes to explain more about the 
importance of the essential benefits package, and how will this 
provision protect consumers?
    Mr. Larsen. It is a very important provision that, as you 
point out, many people believe that they have coverage. 
Insurance policies are complicated, they are complex. Many 
people don't understand them. Transparency is also one of the 
goals of the ACA. But by providing a basic core set of 
important protections, including maternity coverage, people, 
when they are paying money for their coverage, they can know 
that they are actually going to have coverage for, you know, a 
range of conditions that they might have to deal with. And it 
is a very important provision in the Affordable Care Act.
    Mrs. Capps. I thank my colleague for yielding, and I yield 
back the balance of my time.
    Mr. Burgess. The gentlelady yields back.
    The gentleman from Georgia, Dr. Gingrey, for 5 minutes.
    Mr. Gingrey. Mr. Chairman, thank you.
    Mr. Larsen, are you aware that Secretary Sebelius told the 
American people on February 8, 2010, that, quote, ``with health 
reform, premiums will go down between 14 percent and 20 percent 
just by passing the bills''?
    Mr. Larsen. I am not. I can say I am not familiar with that 
particular statement.
    Mr. Gingrey. Well, let me ask you this: Do you agree with 
her, Secretary Sebelius, that Obamacare, which, I guess, will 
passed the next month, March 23, 2010--do you agree with her 
that Obamacare has, in fact, decreased insurance premiums for 
Americans between 14 and 20 percent?
    Mr. Larsen. When fully implemented, I believe that it will 
lower premiums for Americans.
    Mr. Gingrey. Well, we are talking about right now, you 
know, since this became law. You say when fully implemented. 
Are you talking 2014, 2016, 2018?
    Mr. Larsen. Well, I think as we gradually get to health 
insurance exchanges, which I think CBO and many others have 
said will lower administrative costs, create a number of 
efficiencies for small groups and individuals----
    Mr. Gingrey. I understand what your hopes are. I absolutely 
do. But the reality is something quite different, at least at 
this point in time. Can you name one instance where an 
insurance premium went down between 14 and 20 percent since 
Obamacare became law?
    Mr. Larsen. Well, I do know that as a result of, for 
example, I think the rate review law, as well as the medical 
loss ratio law, that insurers have already said and have 
reported publicly, some of them publicly traded companies, in 
their earnings calls that they are moderating their rates based 
on the MLR standard and the potential for rebates. And I think 
we know that the rate-review process in a number of instances 
has resulted in lower premiums for consumers.
    Mr. Gingrey. Mr. Larsen, are you aware that President Obama 
promised the American people on the campaign trail that his 
health care reform bill would bring down premiums about $2,500 
for the typical family when he was campaigning?
    Mr. Larsen. I assume that if you are telling me that, he 
said it.
    Mr. Gingrey. Yes.
    Mr. Larsen. That he said it.
    Mr. Gingrey. He did. You assume correctly.
    Let me just hold up this poster for you, ``Rhetoric Versus 
Reality on Premiums.'' Looking at the far right of the chart, 
2008, going forward to our current time here in the middle of 
2011, the rhetoric in showing these premiums going down from 
the baseline by $2,500 a year for the average family, just the 
opposite, in fact, has occurred. The reality is it has 
increased by $2,500 a family.
    So, you know, when we asked you these questions--and I know 
you have been before the committee a number of times, and we do 
appreciate that, and I appreciate your responding. But Mr. 
Rogers from Michigan, in talking about this MLR issue, you 
know, that would be a pretty easy fix, I think, in regard to 
the brokers and agents, you know. We want to create jobs, we 
are about to destroy a segment of the economy and put many of 
these hard-working men and women out of business. They provide 
a great service.
    Why isn't there an easy fix to that? I don't want to--I am 
not going to ask you to answer the question. I ask it 
rhetorically because I did want to yield the balance of my time 
to the gentleman from Louisiana, and I will do so at this 
point.
    I yield to Mr. Cassidy for the balance of my time.
    Mr. Cassidy. Thank you.
    Mr. Larsen, consumer-driven health plans are really cost 
savings, and people use them. Now, I am concerned that the MLR 
requirement will be very difficult to achieve if you have a 
high-deductible health plan with a $5,000 deductible, maybe an 
HSA beneath, but your MLR is going to be on that amount which 
is 5K and above. That is really going to be very difficult for 
these plans to comply with.
    Are we just trying--do you have a prejudice against them, 
or what is the idea about that?
    Mr. Larsen. No, we are not prejudiced against them. I think 
that, as I indicated before, I will have to go back and kind of 
check the exact applicability. I think we have gotten comments 
on the interplay between the MLR standard and the kind of high-
deductible policies, and next time I am before the committee, I 
would be happy to address that.
    Mr. Cassidy. Now, is there a potential for a perverse 
incentive, because it is my understanding that if these are 
qualified on the exchange, it will be at the bronze level. But 
don't I know that the subsidies don't kick in on the bronze 
level, they only kick in for silver and above?
    Mr. Larsen. I am not sure if that is the case. I would have 
to double-check.
    Mr. Cassidy. Yes, we are both a little rusty on the details 
of a complicated bill.
    Now, then, let me ask you, would there be interest in 
giving a different MLR for a book of business which is 
predominantly consumer-driven health plans?
    Mr. Larsen. I would be happy to look at that. I mean, I 
know certainly the dynamics are somewhat different for higher-
deductible policies, because obviously you are not paying for 
first-dollar coverage for the types of health care benefits 
that, you know, the recipient of one of these policies might be 
getting.
    Mr. Cassidy. So will the rule--do you have latitude within 
the rule to make this, or will it require a statute?
    Mr. Larsen. I have to look at that.
    Mr. Cassidy. OK. So are we going to have another hearing 
because there are a lot of kind of unanswered questions about 
something which is really benefiting people's pocketbooks and 
their health, but it seems as if we need to have a second 
hearing on that.
    Mr. Burgess. Well, Mr. Larsen, if I understood you, you are 
going to get back to me with some detail on the tax 
implications or the medical loss ratio implications as to the 
health savings account portion of a high-deductible health 
plan. And I think the questions, Mr. Cassidy, if we will put 
those in writing, can we ask you to respond to those questions 
in writing as well?
    Mr. Larsen. Yes, I will.
    Mr. Burgess. We may very well have another opportunity, but 
I don't know how long that will be.
    Mr. Larsen. OK. We will do that.
    Mr. Burgess. Bill, if you don't mind getting those in 
detail for him, there have already been some things that we 
have asked to have addressed.
    Mr. Cassidy. OK. I yield back.
    Mr. Burgess. Does that conclude your time, or do you want 
additional minutes?
    Mr. Cassidy. No. I think we have to vote.
    Mr. Burgess. Just a housekeeping detail. I am going to ask 
unanimous consent that we insert the statement of the United 
States Chamber of Commerce into the record. Without objection, 
so ordered.
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    Mr. Burgess. Let me just ask you one quick follow-up while 
we are getting ready to go vote.
    On the issue of fraud--and everyone talks about being able 
to pay for more health care because we are going to eliminate 
fraud, waste and abuse. But on the issue of fraud--and this 
committee has had hearings about antifraud efforts in both 
Medicare and Medicaid, and you stated fighting fraud in 
Medicare was a key goal in the Obama administration--but the 
medical loss ratio regulation excludes health plan investments 
and initiatives to prevent fraud from those activities that 
improve health care. So is there a--do you dissect that out to 
that degree?
    Mr. Larsen. The MLR regulation, I think, strikes a middle 
ground that we adopted from the NAIC, which permits the 
inclusion of fraud recovery expenses up to the amount of 
fraudulent claims that are recovered, and that was the middle 
ground that, again, that the NAIC struck. And they spent a lot 
of time looking at this, I think, struggling with the fact that 
the statute allows for claims expenses and then quality-
improving expenses to be included in the formula, but I don't 
think anyone wanted to provide disincentives for investment in 
detecting fraud.
    Mr. Burgess. So with all due respect, then a company is 
going to have to make a decision that, hey, if we go after this 
money and recover it, that it comes off of our medical loss 
ratio calculation. But if we are not successful in recovering 
the money, then it is money that is calculated outside so that 
it actually works against us.
    And we do know that--I mean, I know from my time in the 
practice of medicine, Medicare and Medicaid, SCHIP functioned 
under a different system than private insurance in this 
country. Medicare, Medicaid and SCHIP predominantly pay the 
bills as they come in, as they are required to do. And then 
they go--if they find something that looks questionable, then 
they go after it, so-called pay-and-chase formula; whereas the 
private companies do run on preauthorization and 
precertification, which also has its set of problems.
    But are you now instructing the private sector that these 
expenses that are related to precertification will be 
calculated outside the medical loss ratio, so we really need 
the private sector to develop a pay-and-chase scenario or a 
pay-and-chase template? That doesn't seem like the correct 
direction to go, because we all hear these terrible stories 
about people getting things they shouldn't have gotten in the 
health care system, but they are always on the public sector 
side. They are always on the Medicare and Medicaid side. You 
rarely hear a news story about one of the private insurance 
companies bemoaning the fact that they sent a wheelchair to 
someone who didn't need it.
    Mr. Larsen. Well, I don't think we are creating incentives 
for pay and chase. I know I was the CEO of a Medicaid HMO in 
Maryland, and I think we had a pretty good sense of what 
investment we could make in fraud detection and what the kind 
of return on investment was going to be. So we had a pretty 
good sense of that, and it didn't incentivize us to do pay and 
chase.
    Again, I think we have struck a middle ground, as did the 
NAIC, of trying to encourage that. You know, just nothing 
prevents companies from doing the right thing, which is 
investing beyond--investing in fraud-prevention activities 
beyond where they can actually include in the MLR formula. They 
still have headroom within the other 20 percent to make that 
investment, and we would hope they would continue to do that.
    Mr. Burgess. Well, this is something I hope you will 
continue to look at, because I do believe it needs to be part 
of the discussion, and we need to keep a focus on it.
    Let me ask you one final question on the issues of taxes in 
the MLR calculation. Section 1001 of the Affordable Care Act 
states that Federal and State taxes should be excluded from the 
calculation. Your interim final rule seems to exclude some 
forms of taxation. Can you give us a little bit of insider 
direction on that?
    Mr. Larsen. Sure. There was a lot of time and energy spent 
in the NAIC public process trying to interpret what was meant 
in the ACA by the reference to----
    Mr. Burgess. With all due respect, it is fairly clear. 
Congressional intent was abundantly clear State and Federal 
taxes would be exempt.
    Mr. Larsen. Well, the only thing I can say is I am not sure 
everyone felt that it had the clarity that you believe is 
there. And, again, there was a lot of discussion around what 
that language meant.
    Mr. Burgess. Well, I mean, that is what it says in the--a 
health insurance insurer offering group/individual health 
insurance coverage shall, with respect to each plan year, 
submit to the Secretary a report concerning the ratio of the 
incurred loss, plus the loss adjustment expense to earned 
premiums. Such report shall include the percentage of total 
premium revenue after accounting for collections of receipts, 
adjustment--paragraph 3--on all known claims costs, including 
an explanation of the nature of such costs, and excluding 
Federal and State taxes and licensing or regulatory fees.
    I mean, that is pretty clear, isn't it?
    Mr. Larsen. Well, I think the issue for us was when we were 
read that in combination with a couple of the other sections, 
not necessarily--I am not sure the one that you cited. So, yes 
I realize it said Federal.
    Mr. Burgess. Would further legislation help clarify that 
for you? Do you need--I mean, congressional intent--and I 
didn't even vote for this thing. This is a Senate bill. I 
didn't write it. The Senate Finance Committee staff wrote this 
bill, as you are well aware. But I think even their intent was 
pretty clear. Do you need additional legislation to give you 
direction on this?
    Mr. Larsen. Well, again, I think we tried to make a 
reasonable interpretation of what we saw. So if Congress 
doesn't believe that we have interpreted this appropriately, 
then I guess it would be up to you to make changes if you felt 
that we had not done what was intended.
    Mr. Burgess. Well, we are up against a hard deadline with 
votes, and I know you are up against a hard deadline with your 
time here. I appreciate, again, your coming back. You heard 
from Dr. Cassidy that there may be the need for further 
opportunity to discuss, because a lot of this is complicated 
stuff, and people are having a hard time understanding it. When 
Mr. Waxman's complaints notwithstanding, the overall popularity 
of this law is sort of stuck in neutral. It is about the same 
place where it was a year and 2 months ago. So it seems like 
this committee could do the country a favor by at least talking 
about this stuff that is included in the bill.
    But this will conclude today's hearing, and I will remind 
Members on both sides that they have 10 business days for 
questions for the record, and I will ask all witnesses 
appearing over the course of this hearing to respond promptly 
to those questions.
    This committee now stands in adjournment.
    [Whereupon, at 3:55 p.m., the subcommittee was adjourned.]
    [Material submitted for inclusion in the record follows:]
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